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Can Google Trends Really Predict Stock Market Movements?

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British and American researchers have found that analysis of Google Trends data may offer a new perspective on the decision making processes for equity traders during periods of large market movements. The recent study of search volume for finance related keywords in Google trends suggest there are patterns that may be interpreted as “early warning signs” of stock market moves.

The analysis might be helpful predicting daily price moves in the Dow Jones industrial average and perhaps other stock market indices. People naturally search for how their employer perform, cause for concern and the economic climate in general when they have reasons to be worried. Same is true when the stock market start to go up; people turn to Google searching for the best way to invest money, how they can increase leverage, buy a new house etc.

Google trends - culumative performance
Above: 326 % return over 7 years.

How do people search in Google when the market is going up?

A theory of power-law distributions in financial market fluctuations (2003) suggest that “Movements in the markets exert immense impacts on personal fortunes and geopolitical events, generating considerable scientific attention to this subject”. Two different strategies have been used in this scientific paper by Tobias Preis of Warwick Business School, Helen Susannah Moat of University College London, and H. Eugene Stanley of Boston University:

1. Google trends long strategy

The first strategy buys stocks in Dow Jones industrial average when the search volume in Google trends decrease for keywords such as:
-Dow jones

2. Google trends short strategy

The second strategy sells stocks in Dow Jones industrial average when the search volume in Google trends increase for keywords such as:
-Dow Jones

Limitations of this study

Perhaps Google trends will be used in a different manner by equity traders in the future. But there are still a few limitations, for instance:
-The authors claim that the results suggest that these warning signs in search volume data could have been exploited in the construction of profitable trading strategies.
-They only use either long positions or short positions in the same trading strategy.
-The research should primary be seen as a quantification of the relationship between changes in search volume and changes in stock market prices. Future work will be needed to provide a thorough explanation of the underlying psychological mechanisms which lead people to search for terms like debt before selling stocks at a lower price.
-The current data set of around 90 keywords and one major stock index is rather limited. Further, the keywords used are very general and not related to actual companies or stock. In coming updates of Google trends it might be possible to get more in-depth data sets even for more specific keywords.

Would you like to know more? Read the supplementary information about Quantifying Trading Behavior in Financial Markets Using Google Trends here or the scientific report over here.

Do you think Google trends can help predict stock market movements? Would you consider buying stocks with help of Google trends? SEO Specialist are confident the last word is not said about this kind of research and hope to see more academic papers related to this subject; especially with larger keyword data set including specific companies names.

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