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What Indications of the Indicators Might Be Indicating

What Indications of the Indicators Might Be Indicating

 

In March 2016, we wrote a blog post about magazine covers serving as contrarian indicators for the stock market. In it, we shared fairly recent covers from The Economist as examples (see In March 2016, we wrote a blog post about magazine covers serving as contrarian indicators for the stock market. In it, we shared fairly recent covers from The Economist as examples (see below).

“Out of Ammo” was published in February 2016 and “Watch Out” in June 2015. Our plan was to revisit this in a year to see how the stock market had performed since these foreboding covers hit the stands. Well, since June 2015, the S&P500 is up 15 percent. And since February 2016, it is up more than 22 percent. 

While writing this new blog post, I decided to dig a little deeper to find research on this magazine cover indicator idea. Turns out, someone indeed has studied the phenomenon. (But of course!)  A 2007 Financial Analysts Journal article, “Are Cover Stories Effective Contrarian Indicators?”, conducts a scientific review of 20 years of headlines from feature stories in Business Week, Fortune and Forbes. The results showed that “positive stories generally indicate the end of superior performance and negative news generally indicates the end of poor (inferior) performance,” the article said.

The key words here are “superior” and “inferior.” The authors conclude that when headlines follow periods of extreme positive or negative performance, magazine covers often do signal the end of that outlier period. Conversely, when the headlines follow a relatively benign or uneventful period, they are less reliable indicators.

I tried to find current magazine covers making market predictions but was unable to find much that was interesting. Hmm. What indication of the indicators does that indicate?

In case you were wondering, PCMA never uses magazine covers to aid our investment decisions.


by Ryan Schwartz
May 11, 2017

 

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