By more than one measure, sentiment has grown less bullish despite the S&P at all time highs. Ro...
Beware Magazine Covers
04/17/2019 4:36 pm EST
A recent Barron’s cover labeling the current 10-year-old bull market as “unstoppable” should give investors pause, writes Landon Whaley who cites the countertrend Magazine Cover Indictor.
Headline risks are everywhere. As an investor, you must stay focused and keep your emotions in check so that you’re not drawn into promises of unveiling the mystery of financial markets. This week’s “Headline Risk” comes courtesy of the Old Institution and their predilection to highlight a market theme after the move is over.
When I saw the April 8 Barron’s cover titled: “is the Bull Unstoppable,” I was reminded of a study done by a couple of analysts from Citibank several years back that evaluated the “Magazine Cover Indicator.”
The theory posits that when an asset class, financial story or other market-based theme hits the cover of a prominent publication, the best days of that theme or trend are behind it. Basically, it is a lagging indicator — lagging so much that it tends to be a reliable fade.
The creators of the Magazine Indicator evaluated covers of The Economist from 1998 through 2016 that were related to “an emotional or hyperbolic portrayal of an asset class or market-related theme.” They assessed each cover for three different criteria: Does the cover clearly reference a market theme or asset class? Can an obvious contrarian trade be justified by this cover? And, does the cover unequivocally make a strong statement on direction? They found 44 covers that checked all three boxes over a 20-year span.
Then they tracked the performance of the asset class referenced over the next three, six and 12 months. The three- and six-month performance was a jump ball; the results were murky at best. However, they found that in the asset classes covered, the trends tended to reverse themselves between six and 12 months after publication. In fact, 68% of those 44 covers were wrong after 12 months. Any strategy or indicator that is accurate seven out of 10 times is worth a further look.
This isn’t just a historical problem; just last year The Economist released an issue on Jan. 18 entitled “The New Titans.” The cover was highlighting the “dominance” of Facebook (FB), Google (GOOG) and Amazon (AMZN), all three stocks peaked seven trading days later. Over the next two months, Facebook dropped 23.5%, not reaching that Jan. 18 price again until May. Google fell 16.6% over the next nine trading days and didn’t regain its Jan. 18 price level until June. Amazon fared better, on a relative basis, declining 15.6% over the following five trading days. It then zoomed on to new all-time highs.
But this isn’t just an Economist matter. By the time, any magazine is willing to devote an entire cover to a market-based story, that theme has been popular for a while and is most likely running out of gas. Not only that, but more importantly for us market practitioners, the Behavioral Gravity for that market theme is most likely in “extreme” territory, so the behavioral risk of a reversal is off the charts.
The “Headline Risk” bottom line is that magazine covers are the ultimate contrarian indicators. They’re the financial market equivalent of the Sports Illustrated cover curse. That said, I’m not ready to call the top in the U.S. equity market, especially if we’re using the S&P 500 as a proxy. However, given the current U.S. Fundamental Gravity, there are far better places for your equity risk capital: energy stocks, which can be accessed through the Energy Select Sector SPDR ETF (XLE) and real-estate investment trusts (REITs), which can be accessed through the Vanguard Real Estate ETF (VNQ).
By the way, the next Barron’s cover highlighted Pharmacy and Health Care company CVS, touting its long-term growth prospects. While CVS’ weakness over the last year may indicate that this analysis may be more forward looking and not subject to the Magazine Cover Indicator, investors should probably take note.
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