Sentimentum Investing: Improving Portfolio Returns by Incorporating Sentiment-Derived CAPS Stock Rankings into Momentum Trading

Abstract

This study improves momentum portfolio returns by integrating sentiment‐derived stock ratings from The Motley Fool’s CAPS system into a relative value trading strategy. The results demonstrate that CAPS ratings can be an effective investment tool and that, in the context of momentum trading, investor sentiment is positively correlated with subsequent equity returns. In the four years following July 2009, the combined sentimentum portfolios recorded 6‐month average returns of 11.90% compared to 3.36% for the momentum strategy alone. The profitability of this strategy underscores the potential for online crowdsourced measures of investor sentiment to inform investment decisions and stands in contrast with the basic premises of the Efficient Market Hypothesis.