Note: My personal site will be adding additional information re: my volatility research and will be updating over the next few days.
Google's dramatic decline on Friday was followed by two solid gains on Monday and Tuesday, leaving GOOG up over 10% thus far this week. That led me to ask the question: How good of a bellwether is GOOG when it is up or down sharply in the short-term?
Going back to August, 2004 (N = 353), we find 30 days in which GOOG has shown a gain of over 5% in a two day period. Three days later, the S&P 500 Index (SPY) is up by an average .56% (20 up, 10 down). This is quite a bit better than the average two-day gain of .12% (206 up, 147 down) for the sample overall.
I also found 21 days in which GOOG was down by 4% or more over a two-day period. Five days later, SPY was up by an average .96%, with an amazing 19 occasions up, 2 down. This is quite a bit better than the average five-day change of .20% (208 up, 145 down) for the sample overall.
Interestingly, the near-term outlook is good for SPY when GOOG is very strong and when it's very weak. Score this one for the bulls with respect to the current market. (Note: Other factors lead me to be concerned about the present market's upside potential; I will outline those on my site tonight). When GOOG is strong, it means that the market's speculative sentiment is alive, and that carries over to near-term market trade. When GOOG sells off strongly, speculative froth is exiting the marketplace, and that puts in a short-term market bottom. Such may have been the case on Friday.
Of course, all speculative leaders end up eventually becoming laggards, so these patterns can't continue forever. In this bull market so far, however, GOOG has been a worthy bellwether.
Keep an eye on the Trading Markets site: I hope to extend the GOOG research in an article.