Retail sentiment predicts next-day equity prices during downturns
An ECB working paper introduces the Reddit Retail Investor Sentiment Indicator, built from 8.5 million social media posts between 2015 and 2026. The study finds that retail sentiment has a statistically significant predictive effect on next-day equity and crypto prices.
Decoding eight million posts
Researchers Fabian Wagner and Julian Metzler classified 8.49 million posts across 14 subreddits from January 2015 to April 2026 using ChatGPT-5.1. The resulting dataset yields 4.16 million high-confidence investment posts after filtering out off-topic content.
The indicator aggregates daily positive and negative posts weighted by engagement and standardizes them using a 365-day rolling z-score.
ChatGPT-5.1 outperformed FinBERT, which frequently misclassified colloquial slang and irony as neutral.
In empirical regressions controlling for volatility and autocorrelation, the first lag of the indicator shows a positive effect on S&P 500 prices at the 1 percent significance level and on Bitcoin at the 5 percent level.
Leading traditional surveys by a week
The indicator captures speculative online retail traders rather than the broader, older demographic found in traditional surveys.
Cross-correlation analysis shows the Reddit indicator leads the weekly AAII Sentiment Survey by approximately one week.
Crucially, the predictive power strengthens during market stress: during S&P 500 drawdowns of at least 5 percent from peak to trough, the lag-1 sentiment coefficient is 3.4 times larger than in expansion periods, reaching 0.0375 compared to 0.0109.
Fast signal, fleeting horizon
The model proves that large language models can convert retail forum chatter into measurable market signals.
Yet the rapid decay of return predictability within twenty-four hours limits its utility for macro forecasting.
The indicator remains a sharp early-warning gauge for financial stability authorities tracking speculative stress.