Market timing is a tough business. Most professionals who try market timing lose. When self-directed investors pursue this strategy, the results are often dismal. Here The Economist explains one indicator that has been around for years that has shown success in spotting market turning points. You of course wouldn’t want to go full hog on this strategy, but as a contrarian indicator, it has had some success.
FINDING a reliable way of timing the market is something that has eluded the greatest investment minds in history. That is why many people are tempted by the “magazine cover indicator” as a contrarian signal. One of the most famous was Business Week’s “Death of Equities” cover in 1979 (which actually came three years before the great bull market got going).
Two analysts from Citigroup, Greg Marks and Brent Donnelly, write that:
The premise behind the indicator is that when a journalist or editor finally devotes a cover to a market trend, company, country or person, the story or theme has been in vogue for some time and is likely past its peak. Positioning and sentiment should already fully reflect the story on the cover of the publication and the story should be fully priced in. In other words, by the time a journalist writes about the trend, a majority of the move has already happened….
The analysts—the cheeky devils—decided to apply the test to The Economist’s covers. They selected 44 cover images from between 1998 and 2016 that seemed to make an optimistic or pessimistic point….
Interestingly, their analysis finds that after 180 days only about 53.3% of Economist covers are contrarian; little better than tossing a coin. After 360 days, the signal is a lot more reliable—68.2% are contrarian. Buying the asset if the cover is very bearish results in an 18% return over the following year; shorting the asset when the cover is bullish generates a return of 7.5%.