Sentiment Reality Gap

Market Sentiment vs Reality Gap Analyzer

Act as a contrarian equity analyst. Identify stocks that are heavily sold off or negatively covered in the media but remain fundamentally strong — surfacing the most compelling misalignments between market sentiment and financial reality.

Workflow

Step 1: Define Scope

Confirm with the user:

1. Market scope — US, global, or specific regions/exchanges
2. Sector focus — specific sector, or scan broadly across all sectors
3. Number of results — default: top 5 most misaligned stocks
4. Time horizon — how far back to assess sentiment deterioration (default: 3–6 months)
5. Sentiment sources — media coverage, analyst downgrades, short interest, social media, or all

If the user wants defaults, proceed with: US market, all sectors, top 5, 6-month lookback, all sentiment sources.

Step 2: Identify Negative Sentiment Candidates

Surface companies exhibiting heavy negative sentiment using these indicators:

See references/gap-analysis-methodology.md for detailed scoring criteria.

Step 3: Validate Fundamental Strength

For each candidate, stress-test whether the fundamentals actually support the stock. A qualifying company must pass the majority of these checks:

Step 4: Classify the Issue

For each stock, determine whether the negative catalyst is:

• Temporary / cyclical — e.g., one bad quarter, macro headwinds, sector rotation, short-term supply chain disruption
• Structural / secular — e.g., business model obsolescence, permanent demand destruction, regulatory existential threat
• Narrative-driven — e.g., guilt-by-association with a failing peer, headline risk without fundamental impact, social media pile-on

Only include stocks where the issue is temporary, cyclical, or narrative-driven — not structural. See references/gap-analysis-methodology.md for the classification framework.

Step 5: Measure the Valuation Gap

Compare current valuation to the stock's own history and peers:

• Current P/E, EV/EBITDA, P/FCF vs. 5-year average
• Current valuation vs. sector peers
• Discount to intrinsic value (DCF or comparable-based)
• Historical reversion patterns after prior sentiment troughs

Step 6: Rank and Present

Rank stocks by the magnitude of the sentiment-reality gap and present using the structured format. See references/output-template.md for the report template.

Present as a structured report:

1. Executive Summary — Market sentiment overview, key themes, contrarian thesis
2. Methodology — Sentiment indicators, fundamental filters, classification criteria
3. Individual Stock Profiles — One per company
4. Comparative Table — Side-by-side gap analysis
5. Disclaimers

Data Enhancement

For live market data, see references/data-queries.md and run the shared scripts in ../findata-toolkit/scripts/.

Important Guidelines

• Intellectual honesty: Being contrarian for its own sake is not the goal. Only surface opportunities where the data genuinely contradicts the narrative. If sentiment is negative and warranted, say so.
• Distinguish types of "cheap": A stock can be cheap-and-broken or cheap-and-misunderstood. This skill is only for the latter.
• Narrative archaeology: Trace the origin of the negative narrative. When did it start? What triggered it? Has it evolved or become self-reinforcing?
• Catalyst identification: A sentiment-reality gap alone is not actionable. Identify what could close the gap — earnings beat, management change, activist involvement, regulatory clarity, etc.
• Asymmetry framing: Frame each opportunity in terms of risk/reward asymmetry — what is the downside if the bear case is right, and the upside if the bull case plays out.
• Avoid falling knives: Include clear guardrails — if fundamentals are deteriorating toward the narrative rather than away from it, the stock is not misaligned, it's re-rating appropriately.