Last week I started a new post thread entitled "NO Price Data at All!" to extol the virtues of "alternative" (i.e. non-price) data as a source of alpha. We saw that the Morningstar Fundamentals data set does in fact provide alpha, as can easily be demonstrated, even in the absence of any price data at all. Now I'm going to play devil's advocate and see if I can provoke a few (friendly) arguments that might cast at least some items of alternative data in a rather different light. Here goes......
When you build trading systems/algos, do you have an underlying philosophy? I do, and mine is that a good system/algo should be a blend of art & science that combines various parts together in such a way that a) each part works on its own, and b) all the parts work together in a synergistic and harmonious way to produce something that is greater than just the sum of the individual parts. However, at least for me, each component must be good enough to produce something of value in its own right. If not then take Occam's razor and remove the non-productive complications. All else equal, simpler is better, less to go wrong, and easier to fix if it does. I can't think of any really good trading-related examples where something is genuinely useful but incapable of demonstrating any merit in its own right on a stand-alone basis.
Many of the Morningstar Fundamentals items can clearly demonstrate their value individually. However, the same cannot be said for some other pieces of alternative data. So why should I trust something like that? If a piece of data can't demonstrate at least some small measure of value (i.e. bring at least a little bit of alpha) in its own right, then why bother with such a thing that is evidently useless (or worse...) ?
I have been playing around with stock tweets, specifically the "PsychSignal Stock Twits Trader Mood" data set , i.e. stocktwits.total_scanned_messages, bull_scored_messages, bear_scored_messages. Sure, if I combine these with momentum & some fundamentals I can get a reasonable-looking result. But to me that doesn't mean anything. I already know that the momentum and the fundamentals are good signals, but if I take them away and just play with the twits, I don't see anything that is clearly distinguishable from noise. Therefore I conclude that, although Mr. Trump may enjoy going around twittering & tweeting, actually they are not useful from an algo perspective and only serve to obscure where the alpha is really coming from.
Maybe I'm just doing something wrong and haven't got the little twitty bits connnected up right. Or maybe they really aren't as useful as I had hoped after all. Please, I invite you (.... anyone ....??) to prove me completely wrong about this by posting a purely "twitty" algo that actually has some alpha significantly different from just background noise on any time-frame longer than a day.
Also, if you have a nice working algo that uses twits as well as other input, try just turning off the twitts part and see if it makes any difference.