Google Predicts the Next Stock Market Crash--And Bull Market

TheStreet.com

NEW YORK (MainStreet)—Is Google God? We already depend on it to tell us who we are, where to go and how to get there. It handles our email and keeps our calendar. But can Google master the stock market, too? Apparently so, according to research published today in Scientific Reports.

Previous studies have shown that data from Google Trends, a tool that analyzes search traffic on the Internet, can predict automobile sales, unemployment claims, and even consumer confidence. If so, perhaps it could forecast the stock market.

Apparently it can. Great googley moogley.

Researchers Tobias Preis, Helen Susannah Moat and H. Eugene Stanley factored the number of clicks resulting for certain search terms and found that Google Trends, can indeed predict market movement.

“Google Trends data did not only reflect the current state of the stock markets but may have also been able to anticipate certain future trends,” the researchers said in their report. “Our findings are consistent with the intriguing proposal that notable drops in the financial market are preceded by periods of investor concern. In such periods, investors may search for more information about the market, before eventually deciding to buy or sell. Our results suggest that, following this logic, during the period 2004 to 2011 Google Trends search query volumes for certain terms could have been used in the construction of profitable trading strategies.”

It’s a wonder these geeks didn’t keep this info all to themselves.

The researchers analyzed the search performance of 98 terms related to the concept of stock markets, with some terms suggested by the Google Sets service. They found that “key increases” in the price of the DJIA were preceded by a decrease in search volume for certain financially-related terms, and conversely, that key decreases in the price of the DJIA were preceded by an increase in search volume for certain financially-related terms.

“Our trading strategy can be decomposed into two strategy components: one in which a decrease in search volume prompts us to buy (or take a long position) and one in which an increase in search volume prompts us to sell (or take a short position),” the report said.

Historic search term data was analyzed for the period January 2004 through February 2011.

“We detect increases in Google search volumes for keywords relating to financial markets before stock market falls," the report read. "Our results suggest that these warning signs in search volume data could have been exploited in the construction of profitable trading strategies.”

The researchers summarized, “We conclude that these results further illustrate the exciting possibilities offered by new big data sets to advance our understanding of complex collective behavior in our society.”

And perhaps make a pile of money in the market.

Also see:

It's Official: Action Alerts PLUS beats the S&P 500 with Dividends Reinvested! Cramer and Link were up 16.72% in 2012. Were you? See what they are trading for 14-days FREE.

View Comments (136)