Are You Wasting Your Time with This Weird Indicator?
It just won’t go away…
Everyone’s going gaga over Dow 20,000. The bulls are becoming cockier by the day.
Of course, the financial media is also having a field day with the prospect of Dow 20,000 hitting before the year is finished. Just check out this recent Barron’s cover:
It sure looks like the market’s getting a little frothy heading into the holidays. Barron’s is getting bulled up on stocks again. Does that mean it’s time to bet against the market?
I don’t think so.
Look, there are tons of dumb market sentiment indicators out there. And right now, I’m talking about one in particular that folks take way too seriously: the magazine cover indicator.
Today, I’m going to reveal the truth about the “magazine cover indicator” and why so many investors make such a big mistake when they try to use it as a timing tool.
Here’s how it’s supposed to work: When some major magazine like Business Week is bearish on stocks or some other asset class, you should start getting bullish. If the cover is bullish, that’s your warning to get the heck out.
In other words, when the mainstream press says one thing, do another.
But is it a reliable strategy?
The myth of the “magazine cover indicator” got its start with the infamous 1979 “Death of Equities” Business Week cover. America had just endured the stagflation seventies—and no one in command of his senses could fathom a return of a bull market for stocks.
And we all know how that turned out…
The “Death of Equities” cover didn’t perfectly sync up with the raging bull that would follow. But it was damn close.
So there you have it. Dead simple, eh? All you need to do is look at the mainstream media, do the opposite just like George Costanza would, and presto—instant riches!
There are some critical nuances you need to understand before you begin relying on anecdotal sentiment readings like the magazine cover indicator.
First up is hindsight. Anybody can pick out the media hype leading up to a market extreme when they’re looking in the rear view mirror. Yes, there’s the “Home $weet Home” Time magazine cover from 2005—the very peak of the housing bubble. And if you want to get a little creative, you also have Amazon CEO Jeff Bezos getting the “Man of the Year” nod from Time back in 1999, just before the dot-com boom went bust.
But here’s the thing… There were plenty of previous bullish cover stories on housing leading up to the Time article that many thought marked the top. Same goes for the 90s dot-com bubble. These stories weren’t rare. But as it turns out, they were worthless as a contrarian indicator…
Did any of your genius contrarian friends sell their positions at any of these previous points when those bullish stories suggested a market top? I doubt it. But if they did, they missed some incredible runs.
Thing is, hysteria is relatively easy to measure—but difficult to time. Markets, like some people, can remain temporarily insane much longer than you might think.
Don’t believe for a second you’re going to time a market top or bottom because of some stupid magazine cover. Look, I like to poke fun at the financial establishment as much as the next guy. But it’s just not that easy.
Another reason to ignore the mainstream press when it comes to predictions: it’s 2016. The old-school media gatekeepers grow more irrelevant every single day. And sometimes they feel they have to make a splash just to stay relevant.
It’s not hard to understand why…
Time and its ilk have lost their clout. Why? The internet and the explosion of countless, specialized news sources. Big news magazines have folded by the dozen as readers find everything they’re looking for online.
There’s just a whole hell of a lot more information out there right now. And no one can control it all, like it was in the old days when it was ABC, CBS and NBC giving the official line. Or Time, Newsweek, and The Economist.
If you need to shore up a bullish or a bearish argument for a particular stock or sector, you just head over to Google and you can find thousands of opinions. You can find bulls, bears, and massive headlines splashed across countless home pages every second of the day. Who the hell needs ABC News?
In 2016, the old market oracles are just additional competitors in the marketplace looking to generate traffic and readership just like everyone else. These dinosaurs don’t set the pace anymore. And their cover stories don’t carry the weight they once did.
Nor should they…
Bottom line: The “magazine cover indicator” is an interesting anecdotal exercise. It’s fun. We all like to poke fun at the clueless mainstream media. It strokes your ego to think you’re right while the press is wrong. But please don’t try to time your trades around any magazine cover. Just don’t.
Reality is far more complicated.