One of the indicators of an investing service run by a prominent options newsletter editor involving using magazine covers and sentiment indicators as a contrarian indicator.
That is, he’s found it’s best to sell when magazines say to buy, and buy when magazines say to sell.
The most famous example was BUSINESS WEEK’s cover for August 13, 1979, on its story, “The Death of Equities.” The Dow Jones Industrial Index was at 840 then, below its 1966 peak when it nearly broke 1,000. It had been going nowhere for over ten years (not so different from right now).
And the 1970s were a decade of incredible economic turmoil — the first energy crisis, incredible inflation, and high unemployment. President Carter was telling Americans to just get used to it, because there was nothing he could do. So turn down the thermostat and wear sweaters.
In short, the magazine was reacting to a long string of bad years, in the economy, politics (Watergate) and foreign events (the fall of Indochina to communism, the fall of Nicaragua to the Sandinistas and the fall of Iran to Islamic radicals). There just no longer seemed much reason to hope, and investing in stocks requires hope.
The greatest bull market in history began in 1982, however, and BUSINESS WEEK was there. On May 9, 1983 they ran an article, “The Rebirth of Equities.” This could be called premature, since it didn’t pick up real steam until 1985, but you could have bought then at low prices.
On September 26, 1988 TIME declared, “Buy Stocks? No way!” and had a picture of an enormous bear. The DJIA was then at 2,000. If you’d listened to time you’d have missed most of the greatest bull market in history.
MONEY MAGAZINE is an example of hitting it right. Their June 1995 cover declared, “Buy Stocks Nows!” The 1990s boom began soon after.
Many include general sentiment as a contrary indicator. They look at such things as the results of the American Association of Individual Investors’s weekly poll of their members as to whether they’re bearish, bullish or neutral. Investor’s Intelligence measures the overall consensus of financial newsletter editors.
There’s an old Wall Street saying that covers this: “The crowd is right in the middle and wrong in the ends.” That is, in the middle of a trend, don’t fight it. Follow the crowd.
However, when a trend is coming to an end but the crowd is still piling on, it’s better to be contrary.
However, the catch in this advice is how do know the middle from the ends? A lot of shorts went broke in the late 1990s thinking the tech bubble was on the verge of busting, when it had a lot farther to go. (I personally lost money by buying puts on Amazon a year before the Tech Wreck. It’s painful to be right too early.)