Google Inc (GOOG): Can Search Effectively Predict The Stock Market?

Google Inc (NASDAQ:GOOG) is a company that is perceived as a tech giant, a company that seems to be influencing many parts of our current tech-savvy culture and with that influence comes knowledge about us as people and with that knowledge seems to come great power. But does that influence, knowledge and power actually affect the stock market – where watching what is happening on Google Search can help you make more money in the market than you thought possible?

OK, so we’re not exactly buying the idea that Google Inc (NASDAQ:GOOG) Search can necessarily predict the market, but an interesting study is out that seems to suggest that specific search terms have a certain correlation with the performance of the stock market. Researchers at the University of Warwick in England and the University of Boston in the U.S. have recently published results of a study in Scientific Reports that make the correlation – that when there is a decided spike in searches under specific keywords, the market tends to respond accordingly.  The study involved checking the trends of specific search terms from January 2004 to February 2011.

The research showed that when Google Inc (NASDAQ:GOOG) search terms like “unemployment,” “crisis” and “short sell” spiked in search trends, the stock market would go down in the days or week following the spike. When those terms were not trending highly, the stock market invariably rallied. The study used the Dow Jones Industrial Average (.DJI) as its measuring stick.

In the study, the researchers look over these various financially based search terms and decide to “invest” hypothetical money according to the trends. For example, whenever the search term “debt” spiked beyond its normal trendline, the researchers would sell their hypothetical stocks the following week. When the “debt” terms declines in its searches, the researchers would jump back in the market.

Over the timeframe of this research, an average buy-and-old investor would have made 16 percent on his money. But the researchers found that, using their strategy in regards to search terms, they returned 326 percent on their money.

“We can learn from Google that, at least historically, search behavior of people can be linked to subsequent stock market moves,” said research co-author Tobias Preis of the University of Warwick. He did go on to say that this research just happened to find “debt” as a strong correlative term, but that it might not apply now or in the future, should investors try to copy this strategy. “The challenge for an investor is to identify terms that are important for the market,” he said.

What are your thoughts? Can Google Inc (NASDAQ:GOOG) be a window into the soul of the market? Do you think investors can show their sentiment by their search terms, and could you see  an opportunity here? Let us know your thoughts about this research in the comments section below.

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