Check out Make Money with Roubini Sentiment Indicator for a hilarious take on one media staple’s correlation with stock market performance. Nouriel Roubini has become famous in the last three years for his correct prediction of a dramatic worldwide recession and stock market decline. Roubini-mania has subsided a bit since the height of the financial crisis, but it doesn’t take many clicks on a finance website to find a mention of Dr. Doom, as he’s affectionately known.
Dr. Dogan at Insider Monkey takes a look at the raw data, using GoogleTrends to form an underlying Roubini Index which gauges Roubini’s media exposure. He then takes a look at market performance, and more specifically, the VIX.
Long story short, it turns out the Roubini Index actually leads VIX performance by about two weeks, allowing for some actionable VIX trades which have made money over the last three years.
Here is our simple trading strategy: Go long the VIX when Roubini Sentiment Index goes %25 above its four-week moving average. Following this strategy over the 2007-2010 period will earn us a weekly average return of an amazing 2.4% (If we had simply gone long VIX at all times, the average weekly return would have been 1.6%). If we hold on to our long VIX position for three weeks, the average return over this time period is 8.25%
I’d be interested to find out what the longer-term trading results are for this new indicator. What’s problematic is that Roubini was completely off the radar until 2006. Here’s a screen grab of his GoogleTrends chart – his name doesn’t start to jump until mid-2007, which would only give us 2 years of worthwhile data (we can only test forward to August, 2009 on a yearly basis).
Click to Enlarge. source: Google
Theoretically we could just use the VIX as a proxy and test the results…check back for more!
HT: Clusterstock
Thanks JP for the article.
It’s not really Roubini who is causing all the turmoil in the market, it is the media spreading horror stories and triggering the crashes in the market. Today it is Roubini, tomorrow it is going to be someone else.
I am sure there are other robust ways of developing a media sentiment index which will precede any significant changes in VIX or the market indices. Roubini has been the go-to-guy in the past couple of years for the journalists who were planing to write scary stories. I wonder how else we can gauge the media’s sentiment today or in the future.
Great original article, and thanks for commenting.
I love comparing the headlines to market action. Just yesterday on ClusterStock there were 2 articles side by side which were basically “10 Reasons Why the BULLS Are RIGHT!!” and “Don’t Look Now, But Stocks Are DEAD!!”
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