Revisiting the Ultimate Contrarian IndicatorJan 09, 2013
Chad Karnes, CMT
In October, Barron's cover article screamed Dow 14,165. It essentially called the top in the markets as the Dow sold off 8% in under a month. Recently Barron's ran another cover story touting Europe as a great place for your money in 2013. The contrarian strategy worked in July and October, and very well could work again.
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
On 10/31 I wrote an article (here) entitled, “What the Ultimate Contrarian Indicator is Saying” that called out Barron’s and other magazine covers as excellent contrarian indicators.
The October 15 issue in Barron's Magazine indeed provided a great contrarian sell signal for investors. "Dow 14,165, Almost There" yelled the cover title when the Dow was at 13,325 (NYSEARCA:UDOW). By the next month, the Dow was down 8% (NYSEARCA:SDOW). Still, after almost four months since that cover story was published, the Dow (DJI:^DJI) has made little progress pricewise and has put investors in the way of an 8% (NYSEARCA:DIA) decline along the way.
Magazine Covers and Sentiment
In Technical Analysis this is called “the cover of the magazine” sentiment technique. The theory is when the crowd consensus becomes too lopsided one way, it is usually 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 warning ETF Profit Strategy Newsletter subscribers on 10/19 “The lack of confirmation (of the uptrend) of market internals such as breadth and sentiment continues. We are waiting for prices to maintain below the Fed support zone @ 1430 (NYSEARCA:SPY) to give us a signal an intermediate top is likely in”. On 10/23 that breach occurred saving investors a lot of headaches as the market fell 8% from its high of 1475 (SNP:^GSPC) down to 1343 on 11/16.
Another Contrarian Sign?
What about magazine covers now?
Barron’s recently released another bold call, this time on Europe in its 12/24 cover story, “EUROPE: Time to Buy”.
As a contrarian it is interesting to me that Europe made the cover page after an already 15% 2012 rally and a 33% (NYSEARCA:IEV) rise from its June 2012 lows.
But, Barron’s is not alone in their 2013 predictions. “Europe in Better Shape than US” was the article on 12/11 from CNBC with strategists suggesting Europe’s stocks looked better than U.S companies in 2013. Bank of America (NYSE:BAC) agrees, “The European Union and Asia (NYSEARCA:EEMA) will likely produce returns between 10% and 16%”. The consensus is bullish European stocks.
The time to put Europe (NYSEARCA:EEM) on its cover was likely this past summer, after an 18% market decline, not after a 33% rally.
Alas! Barron’s in fact did have Europe on its cover this past summer, but unfortunately for them it was in the exact wrong context.
Barron’s July cover focused on Europe’s continued debt crisis and included its cover shot of the Euro (NYSEARCA:FXE) at parity with the U.S. dollar implying a European meltdown. A Euro at parity would mean a 20% fall from where it was when the story went to press in July.
The Euro has actually rallied 10% since that Barron's article.
When the media should have been bullish and looking for a trend change they were predictably bearish, providing yet again another contrarian signal.
The Blind Leading the Blind
Given the consensus bullishness now surrounding Europe supported by strategists, magazine covers, and all the big Wall Street banks, and after an already strong 2012, we would be hesitant to buy into the prevailing “wisdom” that Europe is the place to park your money for 2013. To us it sounds more like recency bias and performance chasing.
Technically, price has reached a momentum extreme at the same time the Barron’s cover article came out (not likely just a coincidence) . Momentum is also now diverging with price. A breakdown of a key trendline at $47 on the Vanguard European VIPERS (NYSEARCA:VGK) would put the uptrend in serious jeopardy likely setting up a technical sell signal.
If price breaks the support, then Barron’s and other popular mainstream media outlets may once again prove that the consensus can be a reliable contrarian indicator and a good tool to use to help identify market turning points. That said, magazine covers are best used in conjunction with other market barometers, such as technical analysis, instead of as stand-alone tools, since the timing of trend changes can sometimes take some time.
The ETF Profit Strategy Newsletter uses common sense, technical and fundamental analysis to help investors stay ahead of the market. The Technical Forecast published a few times each week focuses on the market’s shorter term moves to stay ahead of stock trends such as those in Europe, Asia, and the United States.
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