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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.

Balanced Investing For Balanced Living

In the market’s never-ending story, we never know how its most recent action will play out. One thing we do know is that when the market is more volatile than usual, investors who lack a personalized, long-term plan to guide their way are far more likely to make the wrong moves by the time the cycle is complete. In our opinion, every investor’s long-term plan should include embracing a buy, hold and rebalance approach to investing. This is one of the simplest and most effective ways to diversify, and it may help you prosper in various financial markets over the long term. To achieve this goal, a portfolio is initially allocated based on each investor’s needs across different asset classes, such as stocks, bonds and real estate. The portfolio mix is then maintained by periodically rebalancing. Winning investments are pared back, and underperforming investments are increased during a rebalancing. A rebalancing can occur on a specific date, such as a birthday or anniversary, or it can be done using a percentage of asset method. See my book All About Asset Allocation for a detailed discussion of rebalancing techniques. Figure 1 is an illustration of rebalancing using a 50% stock and 50% bond allocation. When stocks gain versus bonds, their percentage or allocation becomes too large. Shares of the stock investment are sold, and the proceeds are reallocated to bonds. This serves as a risk control mechanism for the portfolio. Another effective way to rebalance is to employ new dollars when they are available. For example, if you were to receive a modest lump sum of cash , you could use it to “feed” the portion of your portfolio that requires additional assets. If you were underweighted in bonds, for example, you could apply the new dollars there. This helps you rebalance, while minimizing the transaction costs involved. Figure 1: Rebalancing a 50% stock and 50% bond portfolio (click to enlarge) (Chart by R. Ferri) Some financial pundits criticize a balanced approach. They say a buy, hold and rebalance strategy is simple-minded and a relic of the past. Often, their solution is to be tactical, meaning they suggest that investors aggressively move in and out of the markets in an attempt to avoid the worst returns and capture the best ones. As it turns out, the data suggests that more than half the experts fail to time the markets correctly ; their portfolios are expected to fall short of the simple strategy they mock so much. Consider Figure 2, which illustrates the returns of a portfolio initially allocated to 50 percent in stocks and 50 percent in bonds from January 1, 2007 through August 31, 2015. The period begins just prior to the worst bear market in recent memory, and includes a surge in stock prices that occurred in the years thereafter. The proxy for stocks was the CRSP Total Stock Market Index, and the proxy for bonds was the Barclays Capital US Aggregate Bond Index. Both indexes hold broad representations in their respective markets. The 50/50 portfolio was rebalanced monthly; annual rebalancing works just as well. Figure 2: Comparing a 50/50 Bond/Stock Portfolio to Each Index (click to enlarge) (Source: CRSP and Barclays Capital data from DFA Returns Program, chart by R. Ferri) At least on paper, every stock investor lost portfolio value during the crushing bear market that began in October 2007. Prices were down nearly 60 percent from peak to trough. A 50 percent stock and 50 percent bond portfolio was down about 20 percent from the peak. Even a portfolio holding only 20 percent in stocks didn’t escape the bear, and was down about 5 percent by the time the market hit bottom in March 2009. Still, Figure 2 shows that the 50/50 diversified, rebalanced portfolio fared quite well during the bear market and the recovery that followed. The return hasn’t matched a 100 percent stock portfolio over the entire period, but the volatility was considerably lower – and volatility matters! Investors who assume the party will never end and take on too much equity risk when the markets are surging upward over extended periods run the risk of capitulating in the next bear market. They often lack a disciplined plan to see their way through, and may never fully recover the realized losses they incur after selling. Lower volatility created by a disciplined allocation to stocks and bonds helps keep you invested during all market conditions. Ideally, our crystal ball could tell us to get out of stocks before the crisis, but realistically, no one knows what the market is going to do in the future. We invest in stocks because in the long term, the returns are expected to be substantially better than those from bonds. We need this growth just to stay ahead of inflation and taxes. Patience is a virtue, though. Bear markets occur without warning; bull markets often follow on their heels with equal unpredictability. And so on, and so forth. Only those with discipline throughout can expect to build wealth according to a rational course, rather than depending on random and very fickle fortune to be their “guide.” Balanced investing is part of balanced living. A buy, hold and rebalance strategy using broad market index funds is one of the simplest and most effective ways to diversify and prosper over the long term. It helps keep us sane and our portfolios more reliably on track during good times and bad. Disclosure: Author’s positions can be viewed here .

Diving Into The Herzfeld Caribbean Basin Fund

Summary CUBA is a closed-end fund focusing investment in the Caribbean. CUBA is currently trading at a 20% premium to its NAV. News in Caribbean has been large driver of fund since it’s inception, that could be changing. A few months ago I wrote an article attempting to recommend ways to profit from the newly rekindled U.S. and Cuban relationship. In this article, I recommend, among other options, the Herzfeld Caribbean Basin Fund (NASDAQ: CUBA ). After receiving a few messages and comments speaking on the haziness of this fund and the caution that should be exercised with it, I was prompted to further research and analyze the fund. In this article, I will divulge my unbiased findings on the fund. Overview CUBA is a closed-end fund that focuses on investment in companies that have potential to recognize large revenue increase from the economic development of Caribbean countries, including, but not limited to, Cuba, Dominican Republic, Costa Rica, and many others. By using a long-term investment strategy, the fund attempts to position itself in such a way to profit from not only tourism in the Caribbean, but also from projects and investments to improve infrastructure, trade, and the standard of living in the region. As the fund’s homepage states, the ultimate goal and investment strategy is long-term capital appreciation, driving fund manager, Thomas J. Herzfeld, to make investments in companies that are not only risk averse, but also poised to grow alongside the region. Findings The elephant in the room with this fund, and the most obvious concern from the comments on my aforementioned article received, is the fund trading at around a 20% premium to its net asset value. This is a red flag for investors, and has been a concern for the past 9 months. Investors do not want to pay a price 20% higher than the value of the assets, before fees, for a fund with a seemingly risky premise. Trading at a premium is a relatively young trend in the larger picture, starting in late 2014 after almost 5 years of discounted trading in relation to its NAV. It is important to analyze the factors that may be causing the sudden jump in price of this closed-end fund. The predominant explanation is investor excitement around Cuba. The trend towards Cuban relations is an unpredictable and exciting one, and investing in something so unknown can be a daunting decision for even experienced investors. This makes a fund that has been involved in the Caribbean for many years an attractive option. The continued news about Cuba has sparked the interest of many investors and the Herzfeld Caribbean Basin Fund is riding a wave of excitement that could very well be the largest contributing factor to the premium it is currently trading at. This is what fund founder and manager Thomas Herzfeld had to say about the topic in an interview with Barron’s. “Yes, it hit $15 a share, and the net asset value was about $7 or $8. That’s in keeping with its history. Whenever there is good news on Cuba, it reacts like that.” The last transition from a discount to a premium price point that the fund made was in late 2014, putting it right on track with the date that movement toward restored diplomatic relations between Cuba and the U.S. was making news, confirming Mr. Herzfeld’s statement. The correct question to ask now is, is this price and growth sustainable? As it is evident that the price of the fund largely depends on Cuba, it would appear that after news dies down the fund will fade with it. On the contrary, if the news gives way to palpable improvement in the market, especially in Cuba, the fund is poised to profit from growth in that nation and all across the Caribbean. The fund has existed solely in a time period when good or bad news was the most influential driver of price. The realization of actual action and efforts to improve relations with Cuba have put a new era of tangible growth from real economic improvement into the realm of possibility for the Herzfeld Caribbean Basin Fund. If this is the case, then it is only a matter of time before the NAV catches up with price as companies reap profits and success while the Caribbean becomes an emerging market and hub for economic and infrastructural development. In addition to the inflated price, investors also pay the management fees for investing in a fund, adding an additional expense to cut into final profits. In the financial reports from the fund, it can be seen that virtually all investments, 99.36%, are common stocks. The fund has no direct investment in the Caribbean, but that being said, the diversity in its portfolio is worth mentioning. The largest portion of the portfolio, 16.75% belongs to leisure stocks, including cruise lines such as Carnival Corp (NYSE: CCL ) and Royal Cruise Lines (NYSE: RCL ), both poised to reap profits from growth in the Caribbean, especially Cuba. The next largest segment belongs to airlines at 15.17%, with investment in airline companies that serve the Caribbean and stand to profit from prosperity in the region. Another important and potentially profitable fund investment focus is in infrastructure. Herzfeld and his team have portioned 11.64% of holdings to construction and materials companies including MasTec (NYSE: MTZ ) and Vulcan Materials (NYSE: VMC ), both companies are based in the southern United States and both are standing ready to supply Cuba with the infrastructure it needs to grow as a country. This could lead to the recognition of profits for the fund and the advancement of the Cuban economy. Investment in these companies not only finds profit from their role in bolstering Cuban infrastructure and economy, but also shows promise in helping other holdings that will feed off of an improved Cuba. Fees to own CUBA are 3.64%, which begs the question, is it worth paying a premium to the NAV and fees for a portfolio of mostly common stocks, of which I could simply own myself? The simple answer, by investing in this fund, one is investing in not only the sum of its holdings, but convenience of immediate diversification and exposure to an exciting market, paired with the expertise of management that has knows the region and has been in business there for years. Manager of CUBA, Thomas J. Herzfeld is a closed-end fund and Caribbean veteran, having written a number of articles and books on the topic, paired with living in Miami for 40 plus years, it was hard for him to not become a Caribbean expert, primarily Cuban. This expertise in both has only been sharpened since he started the Herzfeld Caribbean Basin Fund in 1993. Conclusion The primary concern when analyzing this fund is its relative volatility compared to its price. When the fund trades at a premium to its NAV, it is due mainly to outside factors influencing investor excitement about an intriguing market. It is advisable to proceed with discretion with any investment, but given the volatile nature of CUBA, one should truly analyze the cause and effect nature of the Caribbean and Cuban market exists in and the subsequent cause and effect nature of this market on share prices of not just the fund as a whole, but the companies it holds. It is well within the realm of possibility to see steady and reliable growth in the Caribbean and ensuing growth and performance from CUBA. That said, we could be staring down another situation of investor excitement sending share prices and hopes into the stratosphere only to come crashing down when the reality of the situation does not live up to the high expectations set for it. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (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.