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Thursday, 17 June 2010

With Bears Making Headlines, Time to Get Bullish?

Josh Lipton

Bears are growling on the cover of BusinessWeek.

In the latest issue, our colleagues there assembled a cast of prominent grizzlies that rose to fame in the market crash of 2008 -- including stockbroker and author Michael Panzner, NYU professor Nouriel Roubini aka Dr. Doom, and veteran investment guru Gary Shilling -- to trace the development of their outlooks and where they see the economy going from here.

The cover story notes that as the markets now show fresh signs of panic, much of it emanating from the debt crisis across the pond, the spotlight is swinging back toward these bearish forecasters.

"Their moment could be coming back around," the article emphasizes.

(After sifting through the article, if you're looking for more optimistically inclined analysis, check out twin op-eds in the Wall Street Journal: Bob Doll's "The Bullish Case for Equities" and Alan Reynolds' "Don't Believe the Double Dippers.")

Of course, as Ed Yardeni of Yardeni Research points out, the Magazine Cover Indicator has often provided a great contrarian signal for investors. In other words, magazine covers boast a rich and long history of directing investors in exactly the wrong direction. The renowned strategist provides us with a few examples:

1. A famous example is a 1979 cover of BusinessWeek titled "The Death of Equities." On the other hand, Yardeni notes, the magazine had several alarmist cover stories about the subprime mortgage market that were spot on. The old BusinessWeek was acquired by Bloomberg on December 1, 2009. So the new BusinessWeek may, or may not, be a good contrary indicator, he says.

2. The February 7, 2009 cover of Newsweek declared "We Are All Socialists Now," though it was hedged with a subtitle: "The Perils and Promise of Big Government." The global sovereign debt crisis started last November in Dubai and spread to Europe, starting in Greece last December.

3. On April 19, 2010, Newsweek ran with the title, "America Is Back: The Remarkable Tale of Our Economic Turnaround." The S&P 500 peaked on April 23.

So, there's evidence to suggest that when a prominent national magazine offers us a financial trend -- be it bullish or bearish -- it can work for investors as a contra-indicator. In fact, as our own Kevin Depew reported in Real or Ridiculous? The Magazine Cover Indicator, eggheads have actually proven it.

In 2007, three professors of finance at the University of Richmond conducted a study -- "Are Cover Stories Effective Contrarian Indicators?" -- analyzing companies that were the subject of cover stories in BusinessWeek, Fortune, and Forbes magazines between 1983 and 2002 for stock performance 24 months prior to and 24 months after (i.e. 500 business days on either side of) the date the feature story was published.

See also, "Can You Outrun the Bear?"

CliffsNotes version: A positive cover story typically marked the end of a stock's outperformance of the broad market. A negative cover story, if it didn't actually mark the end of a stock's underperformance of the broad market, at least marked the point where investors short the stock should cover their position.

Alec Young, S&P's equity strategist, tells us that he does think the Magazine Cover Indicator can generally work as a helpful metric for investors.

"It is a behavioral finance tool," he says. "By the time something makes the cover of a magazine, it is well priced into the market. It has validity."

However, Young doesn't think we can employ the indicator for the recent BusinessWeek cover. The market gurus cited in the article are smart secular bears making long-term bets, he argues, and it's too soon to dismiss their arguments. More to the point, right now, bearishness doesn't abound in the canyons of lower Manhattan.

"The markets have been pretty positive over the past 15 months," he says. "It's only in the past two months that we have had a correction."

While we had him on the phone, we also took the chance to ask Young for his own two cents on the market. The strategist describes himself right now as "moderately optimistic" with a 12-month forward target for the S&P of 1270.

"Recent data show signs that, yes, there are challenges to the global recovery, but a double-dip is pretty unlikely," he says, noting, "We are getting more confident that we have transitioned from a correction environment to more of a trading range."

On the sector level, Young remains Overweight Health Care and Technology. Investors can play along by putting money to work in exchange-traded funds like the Technology Select Sector SPDR (XLK), which includes holdings like Apple (AAPL), Cisco (CSCO), Google (GOOG), Hewlett-Packard (HPQ), and Intel (INTC).

Nothing contained in this article is intended as a solicitation for business of any kind or for investment in the firm.

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