Seeking Alpha
What is your profession? ×
Long/short equity, arbitrage, event-driven, research analyst
Profile| Send Message|
( followers)

There's a long line of past magazine covers that, after some extraordinary run in the market, proclaim its continuity, only to see that same market quickly turn aggressively against the trend in question. There have been enough of these instances that pundits invented a popular financial term for the phenomenon, the so-called "Magazine cover indicator", which refers to the tendency that exists for whatever trend which is highlighted on the cover of a large-circulation magazine (Fortune, Time, Newsweek, etc.), to come to an abrupt end.

The reasoning is that as soon as some trend is popular enough to merit a magazine cover, such means everyone is already on it, and there's no further buying/selling power to sustain it.

There are many old and new examples of this theory at work. Here are just a few:

Drowning in Oil

Oil had just fallen to slightly over $10 per barrel in March 1999, from more than $30 a decade earlier. What more could the magazine do, than speculate it was headed to $5-$10? Well, something a bit different happened

The Metal Man

Coming in the heels of a strong rally that had seen Mittal go from $2 in September 2002 to nearly $40 in February 2004, Fortune decides to do a lavish article on Lakshmi Mittal, Mittal's CEO at the time. 4 months later Mittal touches as low as $22.25, for a loss of more than 40% in just a few months.

Home Sweet Home

The real estate market had been on fire for years, with stocks such as Toll brothers coming from near $4 in early 2000 to over $52 in June 13th 2005. That's when Time Magazine decides to do a euphoric article on owning real estate. You know what happened next, in just over 1 year, Toll Brothers was trading close to $22, for a loss of more than 55%. And Toll was not the only homebuilder stock imploding; all the others were going the same way.

What about now?

Most are aware that the market has had quite the run in the last 2 months. Not so much in terms of magnitude, the S&P 500 (NYSEARCA:SPY) is up 15.9% since November 25, the Nasdaq (NASDAQ:QQQ) is up 18.9% and the Dow Jones (NYSEARCA:DIA) is up 14.0% since then, but in terms of consistency - with market sessions during 2012 so far consisting mostly of a straight line up.

Only now have the first cracks in this up-trend shown up with the possible slowdown in China.

So what did Barron's have for a cover article in their latest issue? "Enter the Bull", with a huge "Dow 15000" cover...

click to enlarge

Conclusion

This is not a scientific theory; it's not the kind of 'hard facts' theory where one can even have an estimate of how probable it is for it to be right. But after the run the market has experienced and with some legitimate doubts over whether the run can continue beginning to surface, it hardly seems like good right timing for Barron's to put out a cover extolling the continuity of this bullish trend. As a result, such a cover must be seen not as a confirmation of the current trend, but rather as a possible sign of danger ahead.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.