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How to Use Google Trends as a Leading Trading Indicator

|Includes: iPath S&P Crude Oil Total Return Index ETN (OIL)

I'm always on the hunt for contrarian indicators - sometimes too much so, my friends and loved ones may argue (like when a hot bartender floored me with her monetary acumen) - but I just can't help myself!

So I got to thinking - these days when people have something on their mind, what do they do with that thought? Often before we even articulate a thought out loud these days, we'll plug it into Google.  It's almost like Google has a direct hook into our brains...which is why the company is so ridiculously profitable.  They essentially "know" what we're thinking, and they offer highly targeted ads based on this - and lo and behold, we gobble the ads up!

Google Trends is a fun tool to play around with - it shows how Search Phrases, and also News Items, are trending.  I plugged in a few popular investing related search terms to see if we could find a cool trend - and found a neat example to share, featuring hot button item "Peak Oil":


Google Trends data for search phrase "Peak Oil" - 2004 to date.

Let me direct your attention to 2008, where search volume registered a very strong near term peak in late May 2008 - roughly a month before the oil market topped!

Very interesting that while traders were still bidding up the price of crude, your average Joe internet surfer was "over it" already!  And as we know, oil crashed from a price of $150 that June into the $30 range before the epic fall was all said and done.

As for prominent news stories , which are marked by the letters - the news was it's usual "trailing indicator" self in this case.

Yes, just as internet searches were peaking, and oil was about to peak, the Telegraph was reporting how savvy investors were making a fortune cashing in on peak oil!  Were all the stars aligned for an oil crash, or what? Not to be outdone, the next news item reports: That was decisively after oil had already topped, and was on the way back to the $30. We know that the financial news is a classic lagging/contrarian indicator (anyone catch the recent NewsWeek cover btw?)

So could Google Trends actually be a leading indicator for the market?  This is just one datapoint, but an interesting exercise - check back later in the week, as we continue to explore the potential relationship between search engine queries and asset prices!

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Disclosure: no positions