Buy low, sell high, the old adage goes. The problem, of course, is that it’s impossible to know which way the market is about to move. Or is it?
In a bid to climb inside the heads of millions of investors, British researchers compared 98 search terms typed into Google between 2004 and 2011—examples include “inflation,” “portfolio” and even “cancer”— to the performance of the Dow Jones Industrial Average. The researchers used a simulation tool to buy short positions in a portfolio that tracked the index (a bet the market would decline) when the frequency of the search terms being tracked spiked, hypothesizing investor nervousness would first manifest itself as a flurry of Google searches. By contrast, when the frequency of the queries fell, the study’s authors bought the index.
It turned out that trading on mentions of “debt” was extremely good at predicting market declines, allowing the simulator to earn a 326 per cent return over the study period, compared to 16 per cent for a more conventional buy-and-hold strategy. There were, however, several less obvious predictors of an impending sell-off, including the word “restaurant.” Perhaps investors planned to treat themselves to a nice meal after recording a sizable capital gain?