Jan 29, 20236 min read

Build A Trading Strategy Using Google Trends

Predict stock market moves.

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Asset Bubble Theory — Trading Stocks using Google Trends

VIDEO TRANSCRIPT BELOW:-

Thanks for the visit. In this video we look at how powerful google trends can be in determining the direction of the stock market, or individual stocks themselves.

The findings are based on research studies and my own personal analysis. One such study which we look at shortly, found that a simple google trends strategy over a 7-year period, returned in excess of 300%, whereas a buy and hold index approach yielded just 16% over the same period. Before we get into the detail, be sure to subscribe to the channel and view our growing library of stock trading videos, where we review strategies, popular books, and numerous trading studies.

I also share the detail of my personal strategy developed from over 30 years of experience, with full transparency on how I grow my trading account, including our bespoke breakout scanner to help identify qualifying stocks.

So what is Google Trends, and how can we use it to our advantage? Simply put, google trends allows analysts to see how often certain terms are searched. In theory when there is high interest for a term such as ‘stocks to buy’, there is positive market sentiment and stocks should outperform. As an example, using the search term against the S and P 500 index, we can make some interesting correlations. On March the 22nd 2020 during the pandemic, the index bottomed, whilst the search term ‘stocks to buy’ peaked 2 days prior, thereafter the search term remained elevated and the index recovered strongly. The search term became less frequent as the market began to decline, the declining market trend was equally matched with a decline in the search term.

Let’s move on to the research study titled ‘Quantifying Trading Behaviour In Financial Markets Using Google Trends’. The abstract of the research says;

“By analysing changes in Google query volumes for search terms related to finance, we find patterns that may be interpreted as early warning signs of stock market moves”

The chart they present as an example of their findings is in relation to the search term ‘debt’. Debt was chosen as a word of financial concern, over a period covering the great financial crash. Their logic suggested that if debt was searched in greater volume there could be a downturn in the markets, whereas a significant decrease of searches would suggest an increase in the markets. The research study goes way beyond what we summarise here, however the principle was based on this google search volume chart.

A trade was made each week based on the search volume of the term debt, if search volume was up, showing as red on the chart, we would sell short the Dow Jones Index, and if search volume was down, we would buy the index. At no point would the strategy be in cash, it was either long or short the index.

To prove that the results were not just luck, the study tested 10,000 random strategies and highlighted the best, and worst-case returns. Their analysis did not stop there, having tested almost 100 other searches with similar outperformance overall. Clearly the study alone shows merit, but I decided to take the theory a step further by looking at singular stocks and other key search terms.

Here we can see the trend for the search term Netflix over the past 3 years, whilst also providing some interesting insight into the stock performance. If we look at the search trend for Netflix through to November 2021, we can see a number of spikes in volume. The increase in search volume was followed by a general rise in the stock price. The search volume however decreased over the following months to a low in late November. If you were holding the stock, such a decrease in search volume could have been a sign for concern. In fact, this bottoming of search volume marked the very top of the Netflix stock, whilst the following year saw the price plummet by around 70% of its value. The decline of search volume and price conveniently timed well with my favourite indicator, the weekly mack dee, crossing and staying down for the entire decline. Soon after, 1st Quarter results revealed a considerable loss in subscribers, perhaps this search volume divergence was an early warning sign…

How about another popular tech stock; Facebook. We can see the search volume for the term Facebook has consistently fallen over the last 3 years, whereas through to September 2021 the stock price grew, a significant divergence indeed, and perhaps a warning sign to carefully consider your position.

Incidentally, a few months later Meta released a statement, confirming that Facebook had lost around half a million daily users in the last 3 months of 2021. Coincidental you may think, although if the price of the stock was increasing, yet search volume was consistently decreasing, it certainly gives merit for further investigation.

How about Bitcoin. Search volume has increased over the last 10 years, but we look for clues regarding the spikes of search volume and the correlation to asset price. If we place the price chart over search volume from January 2017, we do get some interesting insights. In May 2017 we get the first search volume spike, this preceded a huge price move of more than 500%.

In January 2018 search volume dropped sharply from its peak, just prior to Bitcoin losing almost 75% of its value, before the first sign of search volume moving back up. The next significant move up in search volume can be seen here at the break of prior increases. If we made a purchase at the point of the increase in search volume, we would have been in the largest portion of a 600% price move.

We see that over the following 2 years search volume for the term Bitcoin trended down, with a significant drop to previous levels seen in April 2022. The fall in search volume coincided with a peak in prices prior to another large move downward. The astute trader may have recognised the divergence and positioned themselves accordingly.

How about the highly searched online consumer site; Amazon. The search volume for the term Amazon has clearly been in an upward trend for almost 20 years, with the spikes in search volume marking the busy Christmas periods, although we did get an anomaly during the pandemic. If we drew a line under the search volume lows and above the highs, we see the growing channel, however, we also get to see a shift in trend with a lower low and a lower high as we approached the Christmas period in 2021. Once again, anyone holding or looking to take a position could have seen this longer-term shift as a concern. The lower low and the lower high marked areas of peak prices just before prices collapsed. The following two quarters after lower google search volume, Amazon reported losses.

How about the search term; Inflation, perhaps a sign of consumer concern. The last 20 years provided two significant volumes spikes. The first was here in April 2008, search volume trended down for a few years before the spike up. This of course was the year of the great financial crash where Index prices dropped more than 50%. The spike in search volume could have been another warning sign to exit the market prior to the fall, or if we were really detailed in our analysis, we could have recognised the spike here and exited even earlier.

Volume search trended down with multiple lows, suggesting a lower concern for inflation, whilst at the same time the S and P Index rose. A small spike may have been a trigger to sell prior to a price pullback, however it was not until March 2021, followed by May 2021, that we get the next significant spike in search volume. The pandemic was a one-off event and can be ignored for this exercise, however the two spikes in search volume would again have marked the top of the market, just before the 2022 market decline.

Our last chart is the search term; Invest In Gold, clearly a direct term relating to those keen to invest into the asset. In the search volume chart covering almost 20 years, we can see two major spikes in volume, if we then overlay the monthly price chart of gold, we can see an obvious contrarian outcome. The charts closely mirror each other, with each of the search volume spikes marking a peak in the price of Gold. Depending on how we decide to interpret the chart, it could be argued that such an increase in the search term, could be a sign of euphoria and perhaps a time to exit. Conversely, if investing in gold is not headlining mainstream, reflected in low search volumes, It could be a time to look for entries…

Whatever our view of search engine data, its hard to ignore some of the correlations we get with price movement. Many indicators in today’s market are lagging, relating only to previous price moves, perhaps this age of extensively available data measuring collective human behaviour, does in fact present the trader with some leading information…..

As always, thanks for watching.

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