How biz media is often a contrary indicator

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Randall Forsyth of Barron’s writes about how the media coverage of the markets is often a contrary indicator for future performance.

Forsyth writes, “‘As Worries Ebb, Small Investors Propel Markets,’ was the headline of the lead story on page one of Saturday’s New York Times. ‘Americans seem to be falling in love with stocks again,’ the Gray Lady reported.

“To which Barry Ritholtz, chief executive of Fusion IQ, observes, ‘Uh-oh,’ on his Big Picture blog. The bullish tone of the Times piece qualified as a contrary market indicator since it met his four qualifying criteria: a mainstream, non-business publication, with a front-page or cover story about a rallying asset class with a decidedly bullish tone.

“That view was confirmed by Paul Macrae Montgomery, the head of the Universal Economics advisory and the originator of the magazine-cover indicator. Years ago, he studied all the Time Magazine covers going back to the 1920s and found they were redoubtable contrary indicators. By the time Time’s editors put a market trend on the cover, it was within weeks of being played out. A bullish cover meant it was close to time to sell, and vice versa.

“Newspaper stories didn’t conform exactly to the same pattern, Montgomery noted in a phone conversation from his in Newport News, Va., office. First off, for a story to matter it had to get front-page, ‘above-the-fold’ placement, which the Times story had.

“What’s more, newspaper stories tended to signal market tops within two trading sessions, he added.

“That said, however, Montgomery professed less confidence in newspaper page-one stories than magazine covers. Moreover, markets tended to make tops in a longer, more drawn out process. Panic stories that accompany short, sharp breaks usually signal market bottoms and quick reversals, he adds.”

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