What are we looking for?
Let's see how Yin Luo's suggested strategy for September worked. Until recently, Mr. Luo was the quantitative analyst at Macquarie Securities, but he has left the firm to join Deutsche Bank in the new year. He will return with a strategy for this column at that time, but until then let's see how his recommended strategy around U.S. stocks with positive news flow worked last month.
How did it perform?
For September, Mr. Luo used a service called RavenPack, which scours hundreds of news sources - including financial newswires, websites and blogs - for news stories involving U.S. publicly listed companies. As David Parkinson reported last month , RavenPack then uses something called "natural language processing algorithms" to translate language into scores reflecting the degree of positive or negative tone in news stories relating to a given company.
Mr. Luo combined these news sentiment scores with Macquarie's own proprietary EMC2 quantitative stock-picking model, to identify 20 attractive U.S. stocks from all 10 major industry sectors.
"Our research indicates that news sentiment supplements the traditional multi-factor quantitative models effectively," Mr. Luo said a month ago. "The key reason is that news stories provide a different angle from the traditional fundamental and momentum information."
It turns out he was right again, as the average price return of each stock in the portfolio was 5.5 per cent last month versus 3.6 per cent for the S&P 500. His news-flow and quantitative strategy also performed well for Canadian stocks in September, giving credence to the idea that positive news can be measured and is helpful to investors. Mr. Luo's monthly recommendations have beaten the benchmark now in 22 of 28 cases.