Arnamania: Social Momentum as a Leading Indicator

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  • on June 27th, 2012

Guest Post by StockTwits Executive Editor, Phil Pearlman.

Its been wild watching Arena Pharmaceuticals ($ARNA) over the past 5 months as both the $ARNA stream on StockTwits and the price of the stock have exploded.

Social momentum as measured by message volume has increased by over 5000% on StockTwits over 4+ months while the price of the stock increased by 5 fold before today and it looks bid up 30% plus after reopening for trading on the FDA approval news just a little while ago.

This is an amazing chart we created last week which shows message volume on StockTwits overlayed with price of $ARNA stock.

It shows social momentum on StockTwits leading price momentum and it looks like our community nailed it.

Note the message volume spikes in red preceeding the rapid increase in price and then a drop off in message volume as the price actually rose to its high before dropping back earlier this week below 10.

This week (not on the chart) has been a frenzy with $ARNA message volume rising to record highs again presaging this ramp on the news that we are seeing now.

In addition, preliminary sentiment analysis from the brilliant and geeky Noah Pepper over at Lucky Sort indicates “steady positive social signal” in the StockTwits stream that has been increasing since March!

So, if you were monitoring StockTwits closely you would have picked up on this as Lucky Sort and I did and as more and more of our members did also who got involved.

Its impossible for me to be certain whether there is a causal relationship here but I do have a theory as to what is going on and it has to do with the efficiency with which information spreads on StockTwits and across the social web.

There was an excitement around Arena that built and spread and beneath such virality, importantly, there was a kernel of reality to the bigness of it all.

An obesity drug approved by the FDA in a nation of rapidly expanding waste lines is a big deal.

Most recently, over perhaps the past week, it has seemed to me, and this is a qualitative judgment, like a speculative frenzy has ensued with the quality of many of the messages deteriorating as their volume reached record highs and as the FDA decision moved closer and closer.

I view this as overreaction and classic Keynesian animal spirits.

I have no idea whether the price of the stock will hold up and extend or fade as message volume in the name has reached a fever pitch.

I do know though that the trade occured before the FDA news and that it played out live and in real time on StockTwits.

A special shout out to our partners at Gnip who are working hard with us to shine light on this incredible data and to Lucky Sort for their wonderful analytic contributions mentioned above.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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