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Can Google predict the stock market? How a trading strategy based on searches



The frequency of Google searches for words like 'debt', 'unemployment', 'profit' and 'loss' could signal future stock market trends, according to an academic study.

A trading strategy based on searches for 'debt' could have brought in returns of up to 326 per cent by investing on the US Dow Jones index, according to the research.

Drops in the market are preceded by high volumes of searches for common money-related words, which suggest investors are growing concerned, it found.







Google strategy: Transaction costs of trading in and out of market based on search terms were not factored in


On the other hand, low interest in financial topics is a signal that the stock market is about to rise (see graphs below).




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And how taking Twitter too seriously might lose money...


A fake tweet from a hacked Associated Press account hit financial markets last Tuesday, driving the Dow Jones down about 145 points.

A hacker group took over the AP Twitter account and reported that President Barack Obama had been injured in explosions at the White House.

The single AP tweet stunned investors and effectively wiped out $136.5billion of the S&P 500 index's value in a matter of minutes.

The news agency later disclosed that one of its employees may have inadvertently given away company passwords as the result of a 'phishing' attack by the hackers.

The study - carried out by academics from Warwick Business School, University College London and Boston University - suggests that a trading strategy based on Google searches would outperform a straightforward buy-and-hold approach.

The research analysed changes in search frequency for 98 words in the period from 2004 to 2011 using Google Trends.


However, it didn't factor in the transaction costs of trading in and out of the market according to the volume of search terms.

'Analysis of Google Trends data may offer a new perspective on the decision making processes of market participants during periods of large market movements”, said Dr Helen Moat, based at University College London.

'It’s exciting to see that online search data may give us new insight into how humans gather information before making decisions - a process which was previously very difficult to measure.'

Dr Tobias Preis of Warwick Business School added: 'We are generating gigantic amounts of data through our everyday interactions with technology. This is opening up fascinating new possibilities for a new interdisciplinary "computational social science".'

Their academic paper titled Quantifying Trading Behavior in Financial Markets was published in Nature Publishing Group’s Scientific Reports.

ODD TRADING INDICATORS


Trading on the basis of Google search terms sounds less far-fetched than doing so on the basis of women's hemlines.

That one dates back to the 1920s, and an observation (by a man) that booms coincide with short skirts and hard times mean longer hemlines.

There are also plenty of calendar-based stock market rules, like the Santa Claus rally and 'Sell in May and go away, stay away till St Leger Day'.

Don't forget the curse of the new HQ, which suggests you sell a stock if a company builds or moves to lavish new premises.

Other supposed economic indicators range from beer consumption to cardboard boxes orders to aspirin sales.






Source: Quantifying Trading Behavior in Financial Markets





Source: Quantifying Trading Behavior in Financial Markets





Source: Quantifying Trading Behavior in Financial Markets

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