In this article I will be describing a way I use to predict when there is a top in the oil market using Google Trends. Google trends is a tool that shows search volumes for certain words or phrases as well as a quoting Google's page "it shows you the number of times your topic appeared in Google News stories."
- For the first step I went to the Google Trends page here, and typed in the search box gas prices, which brought up a chart as shown in the chart below. What is noticed is that the upper section of the graph was erratic and had really no pattern, but when I looked at the bottom part of the chart I noticed that the NRV [News Reference Volume] did have spikes above the gray line, it is marked with the black arrow below, and during the peak of crude oil of 2008 the NRV was above the gray line, as well as in 2011 and 2012.
- So the next step I did was look at each of the 3 years that the NRV was above the gray line and compare it to how close the peak in the NRV was to the peak in crude oil for that year. Below is that chart for 2008, because the chart is a weekly chart I can only give a best guess as to when the exact peak was. As the chart shows below the peak in the NRV was near the end of July, and looking back at the chart crude oil for 2008 I saw that crude oil peaked on July 11th 2008, so the NRV was within a week or two of correctly predicting the top in oil for 2008.
- Next I looked at the chart for 2011, as the chart shows below the peak in the NRV was near mid to the end of April, and looking back at the chart crude oil for 2011 I saw that crude oil peaked on May 2nd 2011, so the NRV was within a couple weeks of predicting the high in oil for 2011.
- Next I looked at the chart for 2012, as the chart shows below the peak in the NRV was near mid near the middle of March, and looking back at the chart crude oil for 2012 I saw that crude oil peaked on March 1st 2012, so again the NRV was within a couple weeks of predicting the high in oil for 2012.
As all the charts show above Google Trends did a pretty good job at predicting the tops in crude oil, and shows how powerful of a tool it can be, in the future I will explore doing the same style for other things, like stocks, bonds, or gold. When trying to get the specific day the NRV peaked I tried using just the month but the scale was different than the yearly chart so I stuck with the yearly chart to make sure the data was correct. So say the NRV has moved above the gray line, some possible actions to take are listed below:
Find an ETF that is short Oil, there are two non leveraged funds that accomplish that, but they have very few assets, low volumes, and wide bid/ask spreads, but there are two 2x leveraged funds that have more assets, and more volume, and closer bid ask spreads, they are listed below with descriptions from each fund's Yahoo Finance page:
ProShares UltraShort DJ-UBS Crude Oil (NYSEARCA:SCO)
The investment seeks to provide daily investment results (before fees and expenses) that correspond to twice (200%) the inverse of the daily performance of the Dow Jones UBS Crude Oil Sub-IndexSM.
PowerShares DB Crude Oil Double Short ETN (NYSEARCA:DTO)
The investment seeks to track the price and yield performance, before fees and expenses, 200% of the inverse daily performance of the Deutsche Bank Liquid Commodity index - Optimum Yield Oil Excess Return.
If you have a position in an Oil fund like the United States Oil (NYSEARCA:USO), PowerShares DB Oil (NYSEARCA:DBO), or the iPath S&P GSCI Crude Oil TR Index ETN (NYSEARCA:OIL) possibly lighten up the position, or use option strategies like buying puts to protect you from the downside risk, or selling calls against the position you own.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.