Ah, the old Nouriel Roubini-is-a-reverse-indicator measure.
The blog Insider Monkey has a fresh update on what it’s observed in the past: that there’s an inverse correlation between Roubini’s Google Trends ranking and the stock market.
Here’s the latest chart:
Photo: The Insider Monkey
It seems pretty clear. If you see a mega spike in Roubini’s Google Trends presence, then look for a buying opportunity.
But here’s the more interesting part. Roubini isn’t just a proxy for the VIX (volatility) as you’d might expect. In fact, he seems like a leading indicator.
Photo: The Insider Monkey
How do we test our hypothesis about VIX and Dr. Doom, I mean Roubini? Granger Causality Test is the perfect tool for this job. We use VIX as the dependent variable and lagged values of VIX and lagged values of Roubini index as independent variables. So the idea is if lagged values of Roubini index can explain the movements in VIX in the presence of lagged values of VIX, then we can say that Roubini index is Granger causing the VIX (we run some other tests to make this claim, I don’t want to bore you with the technical details). We also test whether VIX Granger causes the Roubini index. Our test results clearly show that Roubini Sentiment Indicator Granger causes the VIX up to two weeks in advance with a very high degree of statistical significance. Naturally VIX does not Granger cause Roubini index. Roubini is indeed the Dr. Doom and maybe he should be put away for the sake of our economic recovery and millions of unemployed workers.
Maybe not. Since Roubini index is a leading indicator of an imminent spike in VIX and usually spikes in VIX come with a decline in stock market, we can develop a profitable trading strategy around this finding. Hey, I have a full-time job and did this quickly for fun, so the strategy I will present now may not be refined enough. However, it is good enough for a modest blog post. 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%. Dr. Doom has been sitting on a huge pile of gold all this time, yet he does not trade (Would it be insider trading if he traded based on what he is going to say on TV the next day?). Google guys could also utilise Roubini index in real-time and trade profitably.