This is the second article where I use Google Trends (NASDAQ:GOOG) to harvest useful trading data. The first article looked at the automotive industry. Several commenters were skeptical to say the least. In fact, SA Contributor Esekla said that "drawing those sorts of conclusions from data like this is terrifically dangerous." In a way, he's right. Don't bet the farm on a Google search term. Google Trends is just a tool which helps us sort data by time and region. If used correctly, it can inform and reinforce your trading decisions. All else being equal, the more knowledgeable trader will win.
Here is a specific, actionable example of how Google Trends data has already been useful to me:
My first article pointed out that consumers were searching more frequently for 'mpg.' Obviously fuel efficiency is on their minds. This lead me to start researching diesel, because a diesel vehicle is typically 30-35% more efficient than its gas counterpart. Further research reveals that diesel vehicles are rapidly gaining market share... so I bought into biodiesel producer REGI. (That trade was also inspired by this article.) My reward was a 2.9% gain on Friday, with more to come I hope.
Today, let's see what Google can tell us about the next recession. What search terms were leading indicators for the 2007-2009 recession, and what do they indicate about the state of the economy today?
The Conference Board and the Fed use economic indicators such as jobless claims, building permits, manufacturing hours, and consumer expectations to predict the economy's short-term performance. To build my own set of indicators, I'm looking for terms which saw a significant change in search frequency prior to the recession (which is indicated by the red box beginning in December 2007). Out of dozens and dozens of candidates, the strongest leading indicators which Google and I found are:
Of these four search terms, the only one which seems to be repeating its 2007 behavior is 'jobless claims.' That could, potentially, indicate a 2014 recession. However, keep in mind that any of these terms could be a red herring. Three of four indicators point to clear skies ahead. For now, I'm being more conservative than I was in 2013, but my money will remain in equities.
Do the indicators make sense? Yes. The high search volume for 'online business degree' indicates that we were overconfident in the market. The low search volume for 'rolls royce' may indicate that the rich were watching their wallets closely. The spike in 'refinance home loan' indicates that folks were having trouble paying their mortgages. 'Jobless claims' was riding at an all-time low just before the crash.
I wish we could go back and look at data for the 2000 recession; unfortunately, the Google Trends data only goes back to 2004. Finally, here are some additional search terms which were weaker indicators, but they might also be useful in predicting a recession:
Disclosure: I am long REGI. 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.