In thinking about market trends and how demand for goods and services (and hence subsequent share prices) is driven by human psychology, media coverage and herding, a lightbulb went off. I wondered if there was a correlation or leading indicator in Google search trending for various terms and subsequent share prices. It’s evident that for certain major market phenomena in recent years, this was the case. The output basically shows you the relative search volume for particular keywords over time. If you see a rapidly increasing term, it’s possible you can beat the market to exploiting an investment opportunity. Conversely, if you see a decline or peak, perhaps it’s time to dump a hot stock. This article seeks to highlight some of these recent phenomena and then considers:
What are the next predictable trends and how can investors exploit search traffic before the data is translated into share price movements?
First, let’s start with an obvious example from Google Trends. You’d expect that during presidential and congressional elections, there would be spikes in the search traffic for the keyword “election”, right? Like clockwork, here’s the graph from Google Trends:
Next, consider the case of how economic malaise often brings with it new sales pitches to the desperate, unsavory behavior and SCAMS. The search term for scam has accelerated dramatically during the current economic crisis. In retrospect, this kind of makes sense, right? Now, from a personal finance and investing standpoint, you should be ever more vigilant and on the lookout for scams. I included the top cities searching for scams – seems to be quite prevalent in Florida – this is what the data is showing:
Housing and Financial Collapse
Now, here are some trends that in retrospect should have arouses some suspicions, but investors continued to bid up financial stocks and believe imminent disaster was just for doomsayers.
- First, consider the search for the word “subprime”. It began to spike in early 2007 BEFORE the Financial Stock ETFs collapsed (check out these ETF articles for various sectors, currency trading, emerging markets and more). Take a look at trends from 2007 on.
- Next, consider the searches for “foreclosure” and “file bankruptcy”. Clearly, these are people searching out these terms because they are either about to undergo this phenomena, or there are local investors seeking to exploit home foreclosures that they can see creeping up in their area. Again, trend up starting in 2007, spiking by early 2008.
- Now, compare these trends with a snapshot of the Vanguard Financials ETF (VHF). Note the first sustained downward trend starting at the end of 2007.
Could the complete collapse of the Financial Index have been foretold and exploited by investors relying on relevant search trending?
Make sure to stay tuned (subscribe in a reader or follow my twitter), as I’m working on a few other examples of historical correlations and leading indicators for significant price moves, as well as what might be next!
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