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Should you go short when the media says go long?

Magazine covers, newspaper headlines as contrary indicators

Dec 21, 2016 @ 1:01 pm

By John Waggoner

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Just as most people think they're above-average drivers, many investors like to think of themselves as contrarians — level-headed skeptics fearlessly stand against extraordinary popular delusions and the madness of crowds.

One favorite contrarian indicator: Newspaper and magazine covers. It's an indicator that has some merit, but if you sell every time you see the Dow Jones industrial average in the headlines, you might meet the same fate as most contrarians: Flat on the ground and covered with hoof marks from the herd on the Street.

Here's how the indicator works: If you see a flurry of markets-related headlines on the front pages of newspapers or, better yet, a bull on the cover of a general audience magazine, it's time to head for the hills. The same holds true for negative headlines or bears on magazine covers.

The classic example was a cover of Business Week, which didn't have a bear on its cover, but was titled “The Death of Equities.” It was dated August 12, 1982, exactly the day the greatest bull market of the 20th century began.

Other instances abound. Barron's produced a cover with the headline “Buy Oil Now” on February 16, 2015. Oil closed at $53.36 the next day, and swooned to $29.32 a year later. (To be fair, it's at $53.09 at this writing.)

The magazine-cover indicator has been popular ever since. On Dec. 16, Jurrien Timmer, Fidelity's director of global macro, made the following observation :

“Finally, as I think about the current rise in equities and the dollar, I'm struck by the trifecta of bullish magazine covers I've seen in the span of just two weeks. First, it was the 'Mighty Dollar' cover of The Economist, then came Trump as Time magazine's Person of the Year, and now we have Barron's boldly proclaiming Dow 20,000 (actually, that could be just a few good trading days away). In my experience, magazine covers can be contrarian indicators. In this case, they may suggest that sentiment is becoming a bit too exuberant.”

Mr. Timmer has some cause to be worried. In a typical mass-market newspaper or magazine, there are plenty of stories competing for the front page: Donald Trump, the Middle East, Donald Trump, terrorism, Donald Trump, baseball. And, truth be told, editors of most mass-market publications view finance as somewhat more interesting than toast. It takes a big financial story, such as the collapse of Lehman Brothers or a market crash, to make the front pages.

By the time a market story has gotten big enough to reach the front cover of Time or the New York Times, the reasoning goes, it could be close to its peak. Partly, this is the nature of the news business. The Dow Jones Industrial Average has hit more than two dozen new highs this year, but you can bet that it will get lots of attention when it hits 20,000. Journalists love big, round numbers.

And because cover stories tend to be big, involving time spent reporting and editing, they tend to be published long after reporters or editors have noticed a trend. With magazines, even weeklies, there tends to be a fair amount of lag time in publishing as well, although in the new internet age, stories can appear online well before they appear in print.

Many examples of the magazine cover effect are best observed in hindsight. USA Today featured a bull on its front page on May 29, 2014; the market has risen at an 11.52% annual pace since then. (The New York Times, The Economist and Time magazine also ran bullish covers in the summer of 2013.)

Assuming the Dow does get to 20,000, you should brace yourself for a slew of magazine covers and major newspaper headlines on the story. Should you be wary? Possibly. But in those cases, you might want to actually read the stories, which were written because of the aforementioned journalistic fascination with big, round numbers. You're likely to find more warnings than warmth in the Dow 20,000 stories.

On the other hand, it's always a good idea to keep an eye out for euphoria — something this bull market has been notably short of. Flows to U.S. mutual funds, for example, have only recently turned positive. If the public is becoming euphoric, it's the saddest euphoria ever recorded.

A 2007 study by the Financial Analysts Journal did find, however, that company-specific cover stories in business magazines can be decent contrary indicators. Part of this is because media visits to corporations are somewhat like media visits to North Korean model villages. You're not going to see anything bad all day. The study's conclusion: If you're short a company and you see a pessimistic cover story about it, you might want to cover your shorts. All the negative information available is already out there, and the stock has hit bottom.

If you're going to be a true contrarian, realize that you're not just trying to go the opposite way that everyone else does. You'll get crushed. You're looking for significant inflection points in the market. Magazine covers, like tips from shoeshine boys or other popular contrary indicators, are just one arrow in your quiver. You need lots of them to make a good contrary call.

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