My Favorite Contrarian Indicator

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Markets have an annoying habit of proving investors wrong. That’s what makes contrarian indicators so powerful.
Today, Nicholas Vardy shares his favorite contrarian indicator… and how it can help you make better investing decisions.

“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.”
– Sir John Templeton

Like the late Sir John Templeton, I’m a big fan of contrarian indicators.

That’s because financial markets have an annoying habit of proving investors wrong.

And they do so precisely when it will cost the largest number of investors the most money.

That’s what makes contrarian indicators such powerful tools.

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If a stock is universally loved, investors are willing to pay a fortune.

If it’s universally hated, it is also likely very cheap.

And if you buy the stock when it’s cheap – and it survives – you can make a lot of money.

Magazine Covers for Investment Advice?

I’ve written before about how I look for stocks that are down by at least 90%.

But there are other, less quantifiable ways to identify these contrarian opportunities.

My favorite one is the “magazine cover indicator.”

The idea is simple.

By the time a negative story about a company makes the cover of a magazine, the company’s stock is likely set to soar.

The same logic applies in reverse.

Whenever a positive story about a company makes it on a major magazine cover, the stock is likely to take a big hit in the weeks and months ahead.

The magazine cover indicator is not a new idea. Even basic investment textbooks mention it.

A few years ago, three finance professors at the University of Richmond put the magazine cover indicator to the test.

They examined company-related headlines from stories in Businessweek, Forbes and Fortune magazine over 20 years.

Their conclusion confirmed the expected: Positive stories suggested that the stock’s recent price performance had peaked. Negative stories appeared right when the stock started to turn around.

The most infamous example of this?

Businessweek‘s August 1979 cover story “The Death of Equities: How Inflation Is Destroying the Stock Market.”

Source: MarketWatch

As Businessweek put it, “For better or worse, then, the U.S. economy probably has to regard the death of equities as a near-permanent condition – reversible someday, but not soon.”

So just how wrong was Businessweek?

The Dow Jones Industrial Average traded at 800 that year.

Exactly three years later, the U.S. stock market embarked on a bull run that lasted 17 years.

And today, the Dow stands at around 25,000.

What Today’s Magazine Covers Say About the Future

Today, the coronavirus dominates the headlines. So few companies are making it to the cover of magazines.

Still, magazine covers do offer an insight into market sentiment.

Take this week’s edition of The Economist – a London-based magazine that is arguably the most global publication in the world.

Source: The Economist

The cover highlights the (apparently imminent) “next catastrophe – and how to survive it.”

The Economist warns us to prepare for asteroid strikes and coronal mass …read more

Source:: Investment You