Here’s a tool to help identify stocks about to crash

Regular readers of this blog are aware that I have been working on a new book on contrarian investment strategies. In fact, over the long weekend, I completed my final edit of the manuscript. Its now being sent to the publisher – who will complete my final edits including cover design. Today, I wanted to introduce you to a contrarian analysis tool that I covered in my favorite chapter of the book: “Using non traditional sentiment indicators”. In that chapter, readers will learn how to find and use institutional-level analysis tools that most retail investors are unaware of. One of these easily accessed tools is the Google Trends. In this blog, I’ll  highlight one way to help you use Google Trends for achieving an edge in your investment success. Google Trends can help you spot mega-overbought investments that are about to peak. A valuable tool, indeed.

To start, I want to highlight that in my book I note three steps in analyzing Google Trend data. These are: “Trend recognition”, “Seasonality”, and “Shock”

I’ll focus on “Shock” analysis today. Its the interpretation tool that I find most useful in identifying market tops. I’d encourage you to order a copy of the book (when its out) for input on the other analytics when using Google Trends – along with a menu of other useful tools that are under-utilized by individual investors.

I’d like to focus on two securities to illustrate the value of looking for “shock” moments within a Google Search Trend chart. One is a recently peaking and declining stock Tesla (TSLA). Readers will know that I was bearish on this stock for much of late 2020 – and I effectively called a peak in my blog this past March. While that call was largely based on the angle of ascent and the stocks move over its 200 day moving average, in the background I was keeping track of the Google Trends chart, which showed peaking enquiries during the fall of 2020 and early 2021.

The chart below shows us peaking activity in February 2020, September 2020 and Feb/March 2021.

The Google Trends chart below illustrates the coinciding Google search enquiries – which peaked quite precisely in sync with the stock price peaks.

Now, lets look at another type of Google Trend search that can help us identify overbought “themes” that both the general population and investors in general may becoming overly fixated upon. Like an individual stock, when an investment theme becomes fanatically discussed or enquired on via internet enquiries, you may be witnessing a peak – even if its just temporary.

As regular readers of this blog know – I was pounding the table way back in the late summer of 2020 to get involved in the reflation and value trade. That meant buying into metals, materials, energy and related commodities. It was clear to us at ValueTrend that the tech and clean-energy sectors were overbought – and the commodity and value plays were oversold. Google Trends showed keen interest in TSLA, one of the clean-energy plays- along with many other stocks that literally peaked while their search trends peaked. The Google Trend chart helped influence us in our decision to move away from growth stocks at that time.

Now, I am seeing huge interest in Google Trend searches of words like “inflation” and “commodities”. This is troubling, and it adds fuel to my recent suggestion, noted on this blog, that reflation based stocks like commodities are at least temporarily overbought. Tesla, above, displayed several peaking Google search trends that lined up with temporary peaks in the stock. But the stock didn’t get too damaged, and moved higher before the most recent serious/substantial mark-down on TSLA began. So please do not take the huge spike in Google enquires surrounding the word “inflation” to imply that the commodity or reflation stocks are about to nose-dive Tesla-style.

It is likely that – as noted on the blog last week – that we are in for a pullback or sideways consolidation on many of the higher flying commodity trades this summer. The bigger picture – particularly for oil which has a very early stage breakout setup suggesting an $80 longer termed target – will carry on after any kind of consolidation or weakness. Based on traditional technical indicators and contrarian indicators like Google Trends, I am suggesting that if you have chosen to reduce your exposure to reflation stocks in the near-term – dips could be bought again as the summer progresses.

Below is the Google trends chart for the word “inflation” Note the massive spike in enquires of late.

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