Google Search Terms predict market movements

I've read both the Google Trends paper and the Wikipedia paper, and implemented both of them. Two major things jumped out at me -<p>1. They tried out 40-50 words in Google Trends and backtested all of them. The word 'debt' is the one that performed best over the 7 year period of the study. Does anyone think it's going to be the most profitable over the next 7 years? Similarly I could backtest 50 signals from a random number generator. One of them is going to be the best over the past 7 years, but that tells me nothing about its prospects for the next 7.<p>2. Eyeballing the graph, about half their return comes from the last quarter of 2008. This tells me (i) the signal just got lucky to be short in a period where the market was tanking, and (ii) they don't have any risk controls. You should <i>never</i> be making 50% of your pnl in a period that represents only 1/30 of your sample. I'm willing to bet that the bootstrap value at risk of this strategy is pretty poor.

Quick everybody, let's all trade this strategy immediately! We'll be rich!<p>Meh. There are a million of these things, and they all backtest great. It's not really meaningful going forward though.

A question about the Quantopian library...<p>Does order(c.security, -c.order_size) account for transaction costs, borrowing costs and vwapping using a symbol specific profile based on volume and volatility? Probably not a big deal for SPY, but would make more of a difference for a larger portfolio.

The instant a meaningfully profitable strategy is disclosed, quants incorporate it to their tools, which generates an arbitrage force that makes it less efficient --and the strategy stops working right away.<p>I wonder if quants had noticed this kind of correlation prior to this result being published in Nature. I suppose yes, it's pretty basic after all (even Google have been promoting Google trends on their finance page as a heuristic for trading, so someone must have done a systematic study a while ago already)

@d--b - your posts are auto-killed and appear [dead]

Be extremely careful with this type of correlation. I had a colleague that thought whatever Twitter sentiment was, would reflect the market at a given point in time. However, this is a fallacy, as any "trend" in the market is already priced in by the time you can react to it. I would strongly recommend against anyone taking this type of strategy to be profitable in the medium or long term.