Spotting the End of a Trend

News outlets provide a great resource for investors. We all know the news provides invaluable information about companies, corporate earnings, interest rates, monetary and fiscal policy, and, of course, general economic conditions. It also provides an objective snapshot of investor sentiment, and that's what I like to use the news for.

Perhaps you've heard of one of my favorite media indicators. It's called the "Magazine Cover Indicator." I kid you not. The premise is simple: When a major investment theme or trend shows up as the cover story of a well-known publication, then that theme is near an end or at least ready to take a pause.

Why does this indicator work so well? Two reasons. First, for news organizations to sell their products, they need to highlight stories that have hit a certain point of critical mass. So when a story makes it to the front cover of a magazine, or the front page of a major newspaper, or as the top story on the evening news for a few days running, it's because it has probably hit some sort of climax.

The other reason the Magazine Cover Indicator works so well is that markets act as discounting mechanisms. That means they look ahead and then rise and fall on developing conditions, which may not be evident to everyone at the time. Eventually, they discount much of what will be the front-page news stories of tomorrow. Therefore, by the time the news organizations have their "critical mass" story, the market has already largely accounted for it. This is particularly true for magazines, because their frequency might be only once a week or once a month, as opposed to daily for newspapers, or even minute-by-minute for 24-hour cable news.

Let's look at some examples of the Magazine Cover Indicator in action, starting with one of the most recent. You will see that the signals were truly remarkable.

The incredible shrinking dollar
In the March 21, 2005, issue of Newsweek, the cover story heralded "The Incredible Shrinking Dollar."

The dollar actually began to fall in February 2002, but it did not receive much attention then. Yet the move continued, and by late 2004, the buck's decline started to attract a big, speculative following. In early 2005, both Bill Gates and Warren Buffett, the two richest men in the world, but not because of their foreign-exchange savvy, came out bashing the dollar. Shortly after Newsweek went with its cover, the buck bottomed out.

Can anyone save HP?
In February 2005, Hewlett Packard (NYSE: HPQ  ) stock was trading near its lows. Then-CEO Carly Fiorina was finally forced to step down after a long and bitter struggle with the company's board over her controversial merger with Compaq.

Yet even though the stock market reacted positively to her departure, BusinessWeek ran the following cover story: "Can Anyone Save HP?"

The stock has risen by more than 50% since then.

The angry market
The summer of 2002 was brutal for stocks. The market seemed to be plunging on a daily basis. The old areas of market leadership -- telecoms, dot-coms, and techs -- were getting obliterated. Corporate scandals were breaking out everywhere, the nation was already fighting a war in Afghanistan, and the drumbeats to war in Iraq were getting louder. Yet few people at the time saw the stock opportunities being served up in equities. I was buying like crazy, but believe me, it wasn't fun to be going long.

On July 29, 2002, BusinessWeek ran a cover captioned "The Angry Market." The face of the snarling bear said it all. The market was putting in a major bottom, began to rise, and has not looked back since.

Dow 36,000
By late 1999, the Dow had risen by nearly 1,400% from where it was 20 years earlier. Despite this huge gain, some were thinking that the market was just getting going. A book published in December 1999 proclaimed that Dow 36,000 was next. To this day, the authors remain the brunt of jokes about excessive bullishness. Everyone knows what happened in early 2000.

Jeff Bezos, Time magazine's Person of the Year 1999
Similarly, Time magazine named Amazon CEO Jeff Bezos Man of the Year and put him on its December 1999 cover. The stock of Amazon.com (Nasdaq: AMZN  ) was trading near its all-time high of 113, and most Internet and dot-com stocks were in the last phase of their rise. The bubble was about to burst.

Economist, 1999, cheap oil
Against the backdrop of what we hear today in terms of high oil and gasoline prices, this next one is truly remarkable. In 1999, the highly respected magazine The Economist did an in-depth story about the oil markets and concluded that low oil prices were here to stay and that it would be hard to keep per-barrel prices from falling into the single digits.

Here are some excerpts:

  • "After two OPEC-induced decades of expensive oil, oil producers and the oil industry as a whole have more or less given up hope that prices might rebound soon ..."
  • "Consumers everywhere will rejoice at the prospect of cheap, plentiful oil for the foreseeable future. Policymakers who remember the pain of responding to oil shocks in 1973 and in 1979-80 will also be pleased."
  • "Yet here is a thought: $10 might actually be too optimistic. We may be heading for $5."

I don't have to tell you what happened next. The Economist could not have been more wrong.

The death of equities
The king of all magazine covers has to be BusinessWeek's Aug. 13, 1979, feature on "The Death of Equities." Every time you mention the Magazine Cover Indicator to someone, he or she shoots back with this example. The title says it all. It was actually one of the greatest times in history to be buying stocks -- it just didn't look like it at the time. You could have bought bargains that are unheard of by today's measures. Of course, you would have had to be patient, because the rally really didn't get under way for another three years.

Visit the newsstand
There are many more examples, and to be fair, this indicator doesn't work all the time. But it does work more often than not. So throw away your quote machines and start taking more walks past the newsstand. You'll be happy you did.

Amazon.com is a recommendation ofMotley Fool Stock Advisor, where Tom and David Gardner scour the market for the best investment ideas, whether they're front-page stories or back-page sleepers. You can try out Stock Advisor for yourself,free for 30 days.

Michael Norman is founder and publisher of the Economic Contrarian Update and a radio show host at BizRadio network. He does not own shares of any of the companies mentioned. The Motley Fool has a disclosure policy.


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