Contrarians take note: The latest issue of Time magazine featured another one of those infamous bull market covers. The bull was displayed rather prominently on the cover under the headline, “How Wall Street Won.”
The cover was clearly celebratory in nature, yet the sub-heading for the article sounded a decidedly cautious note: “Five Years After The Crash, It Could Happen All Over Again.” Normally the Time cover would be interpreted as a contrarian bearish signal for the stock market – a “heads up” warning that a topping process could well be underway with the potential for a sharp reversal in the coming weeks or months. The addition of the proviso about a potential market crash, however, would lead one to speculate that perhaps the somewhat bearish tone of the article cancels out the cover’s implication. One of the pioneers of the magazine cover indicator, Paul Macrae Montgomery, has offered a different spin on the latest Time cover, however. He related to Randall Forsyth in this week’s issue of Barron’s that the cover’s graphic superseded the cautionary message of the Time magazine article.
“If historic probabilities reliably forecast the future, there’s an 80% chance the market will top in a month and will be lower a year from now,” he told Forsyth. Montgomery’s analysis of the latest Time cover jibes with some other recent magazine covers which point to excessive optimism among investors. For instance, the aforementioned Barron’s published a “bull” cover on September 2 under the headline, “The Bull’s In Charge.” The cover featured a smiling, sunglasses-wearing bull holding multiple shopping bags while talking on a cell phone; in the background an angry bear simmers at being left out of the shopping spree.
In last week’s issue of Bloomberg Businessweek the cover featured a picture of the world’s biggest ship being constructed by shipping line Maersk. The cover is significant since record-breaking structures like skyscrapers and ships tend to coincide with peaks in the economy.
To be sure, the magazine cover indicator isn’t infallible and it’s admittedly more reliable, for timing purposes, at bottoms than at tops. Nevertheless, a slew of optimistic magazine covers featuring bulls or other symbols of extreme optimism are common in the weeks and months leading up to major tops. Ironically, the latest Time cover doesn’t present us with a timing tool but it does at least provide a warning that the market could be in the process of rolling over as we heading into the fall. Take this message with a grain of salt if you must, but keep it in mind as we head into the fourth quarter, especially if the NYSE internal momentum indicators start deteriorating.