Bearish Magazines May Be a Buy Signal

04/02/2008 12:00 am EST

Focus: MARKETS

Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Bernie Schaeffer, editor of Option Advisor, says the preponderance of recent gloomy magazine covers may have been a contrarian signal.

Judging by the magazine cover stories during the past few weeks, the media has given roughly the same degree of coverage to the events roiling Wall Street as they have to every utterance from the Democratic [presidential] hopefuls.

In fact, during the past two months, approximately nine market-related cover stories have graced the jackets of five major publications-all with a consistent bearish tone. From BusinessWeek to The Economist and from Fortune to Newsweek, we have seen rampant concerns regarding the stock market's volatility, looming economic recession, stifling credit market crunch, and systemic problems of Wall Street.

We have never seen such an onslaught of negative cover stories in all our years of tracking the market. There are always periods when there are two or three negative covers in a month, but nothing close to the degree we are currently seeing. The only period in recent memory where there was such a proliferation of negative magazine covers in a short time was in 1998. But even that period falls short of the sheer volume we are now witnessing.

Magazine cover stories have been important at key market bottoms throughout the past 30 years. Some of the titles are now considered classic contrarian signals-"The Death of Equities" (1979), "The Crash" (1987), "High Anxiety" (1990), "How To Survive A Scary Market" (1994), "How Worried Should You Be?" (1998), [and] "Whipsawed by Wall Street" (2003). When a financial trend is featured on a magazine cover, the chances are that this trend is already widely known, universally accepted, and in place for a decent length of time.

With so much media attention being given to financial market problems, does this mean all the skeletons are out of Wall Street's closet? The magazine cover indicator would suggest that some or all the worst has passed.

In fact, the latest cover story of broken "Wall Street" (along with breadth and interest rate indicators) signaled to one prominent market prognosticator that we highly respect (Paul Macrae Montgomery) that it was time to turn his intermediate-term stock model positive.

Turning our attention from the broad market, we see that it's not hard to find a negative cover on housing. Cover stories on housing include "Bonfire of the Builders" (August 13, 2007) and "That Sinking Feeling" (October 15, 2007). More recently, we have "Meltdown: For Housing The Worst Is To Come" (February 11, 2008). As a contrarian, housing may be an area to consider a small allocation of risk capital.

On the other hand, technology has received a number of positive mentions and accolades on the magazine-cover front. From our contrarian perspective, we have some growing concerns in the area of tech. One may want to consider an adjustment in allocation for this overly optimistic group.

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