What the Ultimate Contrarian Indicator is SayingOct 31, 2012
Chad Karnes, CMT
Contrarian indicators have been around as long as the markets. One famous indicator focuses on the mainstream media and their predictions. By the time they grab onto a popular topic, its attractiveness as an investment has typically peaked.
When you were a kid, do you remember wanting or doing something and being asked by your parent, “Why do you want to do this”? A child would almost always reply, “Because everyone else is."
Those familiar with this life lesson also know the next part of the story where the parent replies, “if everyone was jumping off a bridge, would you want to also?”
The Blind Leading the Blind
The October 15 issue two weeks ago in Barron's Magazine provided a great signal as a contrarian indicator for investors. "Dow 14,165, Almost There" yelled the cover title when the Dow was at 13,325 (NYSEARCA:DIA). So far, the Dow (DJI:^DJI) is down 250 points to 13,075 in the two weeks since it was published.
Magazine Covers and Sentiment
In Technical Analysis this is called “the cover of the magazine” technique. The theory is when the crowd consensus becomes too lopsided one way, it is usually eventually captured by a popular media outlet such as magazines. Often that side of the trade is exhausted by the time the media gets a hold of it and the opposite actually occurs.
In this case, Barron's was capturing the consensus opinion that the markets were poised to continue to rally. However, we saw it differently.
There are hundreds of examples of the cover of the magazine in action.
Arguably the most popular historical example occurred in 1979 when the “Death of Equities” BusinessWeek cover marked the end of the 1970’s bear market when the Dow was at 833. The Dow was up over 10% less than a year later, as it kicked off one of its best decades ever in the 80s.
The Jan 22, 2007 Time Magazine cover issue feature of China (NYSEARCA:FXI) is another example of a magazine counter-intuitively marking a top. Time, of course, was calling for a continuation of the bullish trend. A contrarian would see this as a tell-tale sign to get out of Chinese stocks (NYSEARCA:EEM).
Initially the Shanghai Index’s (SHANGHAI:000001.SS) price continued up, but once it crested a few months later. Then, the market fell hard and fast. At current levels of 2059, the Shanghai Index, after 5 years, is still well below the 2800 level of January 2007 that occurred when the Time magazine article was written.
What about the National Football League?
A similar more mainstream example of the cover of the magazine indicator is the “Madden Curse” in NFL football.
This contrarian theory is based on the popular John Madden NFL video game produced by Electronic Arts (NASDAQGS:EA) and how that game affects the season of whichever player is “lucky enough” to grace the cover.
Historically when a player is pictured on the front of the cover, the following year, they usually have a significantly bad year, or even worse, a major injury. This year’s cover was of Calvin Johnson, or “Megatron” if you prefer his nickname. With this season already halfway over he has only 1 touchdown through 7 games. Last year he led the league averaging 1 touchdown per game and finishing with 16 total. Oh, and the final other candidate for the cover that was beaten out this year by “Megatron” is QB Cam Newton, whose Carolina Panthers have started the year 1-6. Both players seem to have been bitten by the “curse”.
As a contrarian, if you were able to buy or sell NFL players, selling those that appear on the cover of the Madden video game has worked well.
Contrarian, Technical, and Sentiment all Combine for Signals
What about right now? The technicals, sentiment, and contrarian indicators were all aligning well before the Barron's cover two weeks ago, though. We were not willing to buy the market (NYSEARCA:SPY) and advised our subscribers in the 9/9 ETF Profit Strategy Technical Forecast, “I will not be chasing this rally, given most of the underlying issues we have called out the last month are still in place.”
More recently, on 10/19, the same weekend the Barrons article was calling for new highs, we advised subscribers, “We are waiting for prices to maintain below the Fed support zone @ 1430 to give us a signal an intermediate top is likely in." The market (SNP:^GSPC) fell below 1430 the following trading day and is now down 2% from those levels.
There's yet another major support level that's very close, and if breached, would be a sign a longer term top has likely occurred. And if it does, then Barrons magazine may once again prove that magazine covers have been a reliable contrarian indicator. That said, magazine covers are best used in conjunction with other market barometers instead of stand-alone tools.
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