It doesn’t take a great leap of faith to accept that search volumes can help us make real world economic predictions. People increasingly look for information online to inform their decisions in the physical world; we research big purchases online before going to the store. In the same way, people increasingly look for information from social media and search engines to inform their trading decisions.
MKTSTK’s Head of Research, Thomas Pendergrass, presents a step-by-step tutorial on how to harvest and analyze the data available from search engines and social media websites. Intro to Social Data for Traders will guide you through using search engines and social media sites such as Google, Twitter, and StockTwits to do sentiment analysis on individual stocks and the market as a whole.
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The charts above and below plot Google’s search volume for the term “stock market” against the value of the CBOE VIX index, which is traditionally used by traders to track the level of fear in the stock market. As you can see, the search volumes predict the future level of the VIX to a surprising degree: the VIX and search volumes are 75% correlated in 2014 alone!
As the chart below highlights, panicky traders searching for “stock market” led the rise in the VIX before the markets reacted. Anyone looking at search volume could clearly see that something big was concerning the market. Search volumes spiked before the bankruptcy of Lehman Brothers, which sparked a market crash. Being an informed trader means looking at all possible sources of information, not just price.
Categories: Quantitative Trading