Can Google Help Predict a Stock Market Crash?

Over the past few weeks, the All Ordinaries Index has fallen and risen over 5 per cent, which highlights how the masses tend to react emotionally to the market. Benjamin Graham the father of value investing once stated that ‘an individual who cannot master their emotions is ill-suited to profit from the investment process’.

Are searches in Google a reliable indicator of market movements?

When the market is volatile and investors are emotional, there are huge spikes on Google related to search terms about the market. For example, since the start of January, the term ‘stock market crash 2022’ has spiked eight times. On six of those occasions, the increase in searches occurred when the market was at or near a bottom and about to turn to trade up. In my opinion, Buffett’s advice about buying in doom and selling in boom seems validated by these Google searches.

There is an old saying that investors typically buy at the top and sell at the bottom and when you compare searches in Google to market highs and lows, you start to see how this statement rings true. While the research is not conclusive, it certainly raises an interesting question. Can you predict the stock market based on what others are searching in Google? From the anecdotal research, it may be a good indicator to watch, as the masses generally act emotionally, which often leads to poor decisions.

American playwright Diane Grant once said that ‘it’s better to walk alone than with a crowd going in the wrong direction’ and when it comes to the stock market, walking alone and carving out your own path is far more profitable and less risky than following the crowd. Choosing to walk my own path by taking the contrarian view to the masses is certainly the preferred way and anyone with a little bit of knowledge, and common sense can join me.

What were the best and worst performing sectors last week?

The best performing sectors included Financials up 3.09 per cent followed by Consumer Staples up 0.36 per cent and Consumer Discretionary up 0.24 per cent. The worst performing sectors included Information Technology down 3.04 per cent followed by Healthcare down 2.88 per cent and Utilities down 2.27 per cent.

The best performers in the S&P/ASX top 100 stocks included Bank of Queensland up 12.52 per cent followed by Qantas up 8.41 per cent and Westpac up 7.40 per cent. The worst performing stocks included Pilbara Minerals down 13.47 per cent followed by Lendlease down 10.15 per cent and REA Group down 8.06 per cent.

What's next for the Australian stock market?

Early last week the All Ordinaries Index fell 2.16 per cent from where it opened on Monday, yet by the end of the week it had closed down just 0.39 per cent. The stock market is a constant struggle between the bulls and the bears, and last week the bears were dominating early, while late in the week it was the bulls. However, overall the bulls have been more dominant this month with the All Ordinaries Index currently up over 4 per cent.

The bears are likely to be out early this week, as the Dow Jones and S&P 500 were both down on Friday. Depending on how long the bears stick around and how strong they are this week will tell us a lot about where the market will head in the next month. If the bear’s dominant this week and into next week, then it is highly possible the low in June of 6,581 points will be challenged and more likely broken, with the next level of support at 6,192 points.

That said, if the market can hold and start to rise this week, we are likely to see a sustained rise over the coming months. Given how the market has unfolded over the past couple of months, we need to assume the market is bearish and will continue to be until it confirms otherwise. Again, it is wise to be cautious, have an exit strategy and be selective with any stocks you might buy.

For now, good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.