Can Google’s Search Volume Predict The Market?
The stock market is ultimately a mirror of investor sentiment. Another barometer of investor sentiment could be the number of times the ticker symbol for a company is used as a search term. Google Trends provides a tool that helps track search term volume and it appears to be a forward indicator. Much of human behavior is based on conditioning. Our years, months, weeks and days are clearly mapped out. Within that, our hours, minutes and seconds are all accounted for. You wake up, take a shower, make yourself look presentable, have a cup of coffee out of your favorite mug and you’re off to work. You arrive at work and don’t even remember how you got there. Then you can’t wait to get home where you can eat, relax, look at emails and prepare yourself to do it again the next day. I’ve heard it said that by the age of 35 most of us are on auto-pilot for 80% of our lives. Certainly, if there are patterns in human behavior, there might be some portion of this pattern that provides clues about the direction of the market. Now, I’m no advocate of technical analysis for stock selection, but it can tell you when to buy something you’ve already decided to purchase. In other words, it can help with timing. Measures of volume can give you an idea for the level of interest in the market. Volume, is in a sense, a measure of the market’s current emotion. When that volume lingers, it turns into a “mood”, often trending sideways, up or down over a period of time. Some stocks trend up or down in such predictable ways (within a range) over a long period of time that they can now be said to have a “temperament”. Ultimately, the market is also on auto-pilot. One great thing about being human is this gift of metacognition — the ability to think about the very thing you are thinking about. So let’s ask the question, is there a better way to think about the emotion, mood and temperament of the market? If there is, I’m sure Google has the answer. No, really. They do. Google provides a tool called Google Trends. It shows information on the number of searches for a given “search”. What exactly is a “search”? It’s when someone puts in a word or phrase and then clicks “search”. Easy enough, right? The goal of the “searcher” is to find information about the stock price. So these are presumably investors looking to find more information about a stock. This is a measure of investor interest — good or bad. And, it’s a better measure than volume and momentum, because “searches” are not commitments. This is where people go prior to making a commitment; they do research prior to the investment decision. When the number of searches is abnormally high it could be a sign of eminent change. So, in some ways it is a barometer for potential future action, like a voting poll. I cover banks so let’s look at the top 3 banks in size to see if a compelling trend emerges that can help predict entry/exit points. JP Morgan Chase (NYSE: JPM ), Bank of America (NYSE: BAC ) and Wells Fargo (NYSE: WFC ) are all compelling investments. Though my favorite is Wells Fargo, I also like JPM and BAC. Though WFC edged out JPM in net income again in Q2, JPM is still the largest US bank by assets. Here’s a price/net income chart. JPM data by YCharts And, here’s a chart of searches for the term “JPM” over roughly the same time period: (click to enlarge) Source: Google Trends I drew in the red line. The letters mark news events. You will notice that high search volume is negatively correlated with stock price, which suggests investors search for stock more when the price is going down, but can this be used as a forward indicator; does it have any predictive value? The end of month reading on January 2008 shot up above the red line — this was a change of investor emotion, a change in routine — auto-pilot has been turned off. If you looked at this Google Trends chart on February 1, 2008, you would have seen a spike above the red line. If you sold JPM on February 1, you would have also been one of the smartest people in the world. On August 2009, search volume dropped below the red line which was the start of an increase in price, a new trend. You will notice a spike at (“H”) around the middle of 2013. This is when a news story was put out about JP Morgan Chase in Barron’s. The story created a lot of interest in the stock, but did not result in a sell-off. Indeed, the stock has been fairly steady since August 2009. The dashed line at the end of the chart represents a forecast of future search volume for the term JPM. Based on the search volume forecast, JPM will be going up over the next 3 months, though I don’t know how reliable the forecast can be. The next highest bank in terms of assets is Bank of America . Unlike JPM, BAC’s price has not followed net income which explains the low earnings multiple. Here’s a price chart: BAC data by YCharts And here’s a chart of the search term “BAC” over the same time period. (click to enlarge) This is a little trickier because prior to November 2007, there were no searches for BAC. Suddenly, there’s interest. We go from 0 to 100 (literally) from December 2007 to April 2009. Had you sold BAC on January 1, 2008 (search volume passes above the red line) and purchased again on May 1, 2009 (search volume passes above the upper limit), you could have saved yourself an 80% drop in price. Then from May 2009 to May 2011, searches fell again. Only to have a sharp spike July 2011. Had you sold on August 1, 2011 you could have avoided a 50% sell-off. Here’s a chart of Wells Fargo’s price over the past 10 years. WFC data by YCharts And here’s a chart of the search term WFC on Google: (click to enlarge) January 2008 (just after the “N” mark) was a breakout month for WFC in search volume — this is when folks turned off the auto-pilot and the stock became increasingly volatile. If you sold WFC on February 1, 2008 you would have seemed a genius. The chart also provides a buy signal (folks went back to auto-pilot) when it crossed above the upper red line in February 2009 you would have purchased the stock between $8 and $13. A more prudent investor may want to wait until all “search volatility” has dissipated. Sometime around the beginning of 2011 the market returned to its pre-2008 search volume. At the time the price was around $30. Today’s it’s at $52. Incidentally, the dotted line at the end there looks to be telling us that WFC is trending flat, but again I don’t have much faith in the forecast. A few comments: I’ve noticed that the effectiveness of this tool is only as good at the search term. For instance, Citigroup’s (NYSE: C ) ticker is “C”. It would take some time to clean out the noise. Even a search for “C price” or “C quote” yielded mixed results. There appear to be no correlations between Google Trends and short interest. You might think that as searches go up, short interest would follow, but this is not the case. A big news story, press release (earnings report) will provide a false signal, but you can eliminate this with a quick search. If there are no big news stories, press releases, etc, and search volume is going up, it may be time to sell. While you can ask the chart to show news activity, it does not always pick up company press releases. For example, if we look at the WFC search volume chart (see below) for the past 90 days, we see a spike at July 14, which was an earnings announcement. However, the second spike was the sell off on Aug. 24. The next day WFC hit a price bottom. WFC’s price began trending down on August 19, but the search volume for the ticker symbol did not pass the red line until Aug. 23 (Sunday). So, to put some context on this, on Aug. 22, a Saturday, people woke up and instead of going on auto-pilot they checked on WFC’s price. And, on Monday morning, well, we all know what happened on Monday morning. Now we appear to be back on autopilot, but I’m monitoring closely. (click to enlarge) Google Trends provides data on a daily basis. The presentation here is a snapshot, but if you go to the actual website you will see more granular data. I have an email in to Google to see if I can get a raw data file to run correlations, but that may never happen. I will keep you posted. Each stock has its own temperament. This is not a one “rule” fits all. Finally, to all the critics, this is only research in progress. I am by no means calling this a definitive study, but it’s showing some promising signs. AIAB Subscribers : If you have a bank you would like me to research please send a direct message. I’ve also provided Google Trends charts for the top five non-banks for comparison. Disclosure: I am/we are long WFC, BAC, JPM. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.