Monday, May 20, 2013

The magazine cover indicator

There are growing signs that the bull market is gaining greater acceptance among mainstream investors.  There has, for instance, been a notable increase in the number of times the bull has appeared on the front cover of mainstream financial publications.  The latest instance of the bull showing up on a magazine cover was in last week’s issue of The Economist, which proclaimed “The Bull is Back!”

Last week also saw the appearance of the bull yet again on the front cover of Barron’s, along with the headline, “Dow 15,000: This Bull Has Room To Run.” 

What are we to make of this increase in bullish headline sentiment?  The contrarian in us is tempted to conclude the market is getting frothy and that a top could be approaching.  But not so fast!  The so-called “magazine cover indicator” is a sentiment tool which works best at market bottoms.  At tops the magazine cover indicator isn’t nearly as reliable due to the fact that fear as an emotion tends to reverse much faster than greed.  That’s why market declines often end with sharp, sudden V-type reversals whereas market tops are much more jagged and irregular and can take several months before finally reversing. 

The fact that The Economist has placed a bull on its front cover is no cause for alarm.  While it could be a sign that the point of maximum recognition of the bull market is approaching – and therefore a top – the latest bullish covers are more a case of media belatedly acknowledging a trend that has been in place for four years now.  [Excerpted from the May 20 issue of Momentum Strategies Report]

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