Trader’s Narrative

The magazine cover indicator is a great contrarian sentiment measure because once a topic has reached massive public penetration and put on the front cover of a magazine, the trend is about to finish.

But once in a while we get conflicting covers. And in such a case, the question then is, which one is right? which one do we fade?

A recent example is the cover of Time and the Economist in the summer of 2005. They both came out within days of each other and had very different views of the housing market:

After the Fall
The symbolism of the brick in free fall left no doubt what stance The Economist was taking on this issue. Although housing prices were going up like there was no tomorrow, the Economist was asking about what would happen after the inevitable fall.

I remember reading this while in Europe because I could see first hand the freakish gains in real estate and the avarice that it had fueled over there. Published: June 18th, 2005

Home $weet Home
Now contrast that with the cover on Time showing a man happily squeezing a house in a bear hug. Note the $ instead of “S”weet and the taglines: We’re going gaga over real estate, Will your house make you rich?, Super hot markets, It is time to buy-or sell?, The case for renting.
Published: June 13th, 2005

For some perspective, here’s a chart of the housing bubble (superimposed on that of the internet bubble gone by):

Source: InvesTech’s Housing Index is proprietary composite of the most sensitive stocks in the housing sector.

So which one of those covers should you have listened to?

Obviously The Economist. I myself tried in vain to point out the danger of such a hyper-inflated bubble to a relative who was heavily invested in European real estate. I was given a laundry list of why the argument in the Economist article didn’t matter or was wrong.

But why?

Not because one magazine is inherently better but because one magazine (Time) is geared to a more general audience while the other (The Economist) is targeting a very discerning readership. Plus, if you had read both articles, you couldn’t have noticed that Time’s was simply “fluff” while the Economist one was bursting at the seams with data and more data.

My point is this: to get a really good contrarian cover indicator, look for the most general audience publisher. Don’t go for specialty publications.

The full Economist article (minus tables and graphs) after the jump:

Continue reading ‘When Magazine Cover Indicators Clash’

Alright, here is the belated sentiment overview for the past week:

Sentiment Surveys
There was hardly a change in the LowRisk numbers with still about 57% bearish and only 32% bullish. The AAII bears increased to 59% while the bulls remained almost constant at 25%. So the retail investors are still very frightened - which is good from a contrarian perspective.

Although the bears increased and the bulls decreased, the Investor’s Intelligence survey of newsletter writers continues to be the “odd man out” because it is still showing more bullish sentiment than bearish (41.6% vs. 31.5%).

This dichotomy of sentiment between the newsletter writers and retail investors is rare but it has occurred before. Usually we can discount it because of the subjective method that II uses to come up with the results. But we have confirmation from the Hulbert newsletter sentiment indicators. So for whatever reason, newsletters have not thrown in the towel, despite the +20% market decline. This could be a fly in the ointment, unless we see them capitulate soon.

ISEE Index
The CBOE equity only put call ratio spent several days above or at the 1.0 threshold (click for graph). With the short term market recovery, it has backed off to 0.67 - a neutral reading.

I prefer the ISEE Sentiment Index to the traditional CBOE put call ratio because it provides a clearer picture of the “dumb money”. By the way, when I use a term like that, I hope I don’t offend anyone. It’s just a word that describes a theoretical group of market participants out there.

Here’s a chart of the ISEE Index going back to early 2007:

The previous times it has come down as low as it did recently were very good times to be a buyer: early March 2007, August 2007 and late November 2007. Although we’ve recovered from those lows, as long as the ISEE doesn’t go too high too fast (above 150), we have the stage set for a continued recovery.

Magazine Covers
On the left, is the most recent Economist magazine cover page. The gloomy picture of a man bracing himself against a blustery storm with the superimposed red line showing the dropping stock market is a great negative image. I haven’t had a chance to read the accompanying article but the fact that they went along with this image and the title: “It’s rough out there” gives us all we really need.

To contrast that, Barron’s cover page is a bit more nuanced. Although it shows a bear captaining the ship of the market, a bull is about to “whack” it from behind with a baseball bat (ala Deniro). No doubt, this is a bullish cover and from a strict contrarian point of view, problematic.

But you have to remember that Barron’s is a specialized publication, written for and read by the financially literate. They were the ones that had many prescient covers, including the infamous “Dot Bomb” cover which presaged the bursting of the internet bubble. So I’m not in a hurry to see this as a bad omen.