Once a market move becomes fodder for broad media coverage, that usually means the move has been missed, writes Landon Whaley.
This week’s “Headline Risk” comes courtesy of the Old Institution and their predilection to highlight a market theme after the move is over, and not beforehand.
When I saw this latest cover of The Economist floating around the Net, I was reminded of a study done by a couple of analysts from Citibank several years back that evaluated the “Magazine Cover Indicator.”
We have talked about the Magazine Cover Indicator here on numerous occasions. Many people (including yours truly) believe 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.
To evaluate this magazine indicator, the analysts assessed 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: 1. Does the cover clearly reference a market theme or asset class? 2. Can an obvious contrarian trade be justified by this cover? 3. Does the cover unequivocally make a strong statement on direction? Of 44 instances, the covers were wrong after 12 months 68% of the time.
Last year, The Economist released “Markets in an Age of Anxiety” on Aug. 16, 2019, amid the market meltdown. The day before this edition of The Economist hit newsstands, Aug. 15, 2019, marked the low in U.S. markets. Since then, every sector in the U.S. equity market has gained ground, the U.S. dollar has rallied, U.S. Treasuries are trading higher, and so are 17 of the 21 commodity markets we track. In short, since that magazine came out, nearly every single U.S.-based market has made a bullish move.
In 2018, The Economist distributed “The New Titans” on Jan.18. The cover was highlighting the “dominance” of Facebook, Google, and Amazon, and all three stocks peaked seven trading days later. Over the next two months, Facebook crashed -23.5%, not reaching that January 18 price again until May. Google fell -16.6% over the next nine trading days and didn’t regain its January 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.
Basically, the theory goes that by the time you are reading about it in the public, the move is too late to exploit, or a good candidate to fade.
This magazine cover risk is also not just an Economist-specific matter. By the time any publication 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.
Since this latest technology-centric issue hit newsstands last Friday, tech stocks are down -14.0%, software stocks have lost -10.7%, and semiconductors have gotten the woodshed treatment to the tune of -13.2%. Apparently, history does repeat itself!
By the way, the Feb. 27 issue had caricatures of President Trump and Bernie Sanders, with the title “Could it Come Down to This.”
Since then Sanders was thoroughly trounced on Super Tuesday and has lost his front runner status. Go figure.
The “Headline Risk” bottom line is that magazine covers are the ultimate contrarian indicators. They’re the financial market equivalent of the Madden Curse.
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