How to use HedgeMind Sentiment Indicator to Find Winning Stock Ideas

What is HedgeMind Sentiment? 

The HedgeMind Sentiment measures the percentage of hedge fund managers who expressed bullish (buying), bearish (selling), and neutral views on the stock. It is calculated on quarterly basis. 

What is the purpose of HedgeMind Sentiment? 

Wall Street has a saying "Following the smart money".  HedgeMind Sentiment is generated just for that purpose to make it easy for investors and traders to follow smart money.

Correlations of HM sentiment with stock prices. 

Lets use FB as an example to illustrate this correlation of hedge funds sentiment with its stock price for the past two years.

Chart below shows FB's sentiment history from 2013Q3 to 2015Q3: 

FB HedgeMind Sentiment as of 2015-09-30

FB's HM sentiment infographic has three critical quarters where hedge funds showed very either bullish or bearish sentiment. The most notable one is FB enjoyed strong bullish buyings, recorded 80% bullish sentiment in 2013Q3. Then bullish hedgies sentiment declined and turned to bearish, 61% in 2014Q1. More recently FB's hedgies sentiment became bullish again and had a 55% bullish sentiment in 2015Q2. 

What's the FB's stock price after these 3 key quarters? Let's analyze HM sentiment in FB stock chart. 

FB Stock chart with its HM Sentiment

Note HM sentiment is calculated 45 days later after each quarter when hedge funds complete their #13F filings. So we can assume the earliest date when an investor possibly can react to the sentiment data will be 45 days later after each quarter when its sentiment data is published. 

Followed FB's 80% bullish sentiment in 2013Q3, its stock price gained 40% in 3 months, 57% in 12 months, 120% in 24 months from 2013-11-15. A very positive correlation is observed here. 

Will FB enjoy positive return again after FB had a 55% bullish hedgies sentiment again in 2105Q3? Most probably in the next 3-6 months. So far $FB gained 20% since Oct 1, 2015 to today, Nov 21, 2015. We will follow up later. 

More analysis is clearly required to prove whether the HM sentiment can consistently and systematically show strong positive correlation with a stock price. At least our early analysis seems to be very encouraging.