Content provided by Jacob Godwin, CLS Trading Specialist
In a new attempt to measure consumer sentiment and time the market, British researchers Preis, Moat, and Stanley used data from Google Trends to predict large movements in the stock market by analyzing the volume of query searches of 98 financial terms.
Joseph Stromberg, from the “Smithsonian” explains the study, “The strategy was relatively straightforward: The system tracked whether a word such as “debt” increased in search frequency or decreased in search frequency from one week to the next. If the term was suddenly searched much less frequently, the investment simulation bought all the stocks of the Dow on the first Monday afterward, then sold all the stocks one week later, essentially betting that the overall market would rise in value. If a term such as “debt” was suddenly searched much more frequently, the simulation did the opposite: It bought a “short” position in the Dow, selling all its stocks on the first Monday and then buying them all a week later.”
He goes on to explain the results of the study:
During the period of time studied (2004-2011), making investment choices based on a few of these words in particular would have yielded overall profits several times higher than a conservative investment strategy of simply buying and holding the stocks of the Dow for the entire time. For example, basing a strategy solely on the search frequency of the word “debt,” which turned out to be the single most profitable term in the study, would have generated a profit of 326 percent over the seven years studied—compared to a profit of just 16 percent if you owned all the stocks of the Dow for the whole period.