Magazine cover stories are a favorite sentiment indicator here at Schaeffer's, as they continue to work well to illustrate our contrarian philosophy. The simplified tenet of cover-story evaluation is that when a stock becomes hot news (either on the bullish or the bearish front), it could mean a shift in direction is around the corner. Once everyone – thanks to prominent headlines at their local newsstand – is on board with one particular viewpoint, that viewpoint could be in jeopardy. Naturally, we are not suggesting that using cover stories as contrarian indicators work 100% of the time. You cannot expect a win rate like this from any indicator.
Periodicals are in the business of maximizing sales of each issue. To achieve this goal, editors will often jump on the "hot" topics of the day for their cover stories. When a financial story or broad opinion hits the cover of a major publication, the chances are that this market trend is already:
If the latest issue of Forbes, Bloomberg Businessweek, Barron's, or any financial news magazine features a cover story decrying company XYZ, for example, it could very well mean that the worst is over for the shares. In contrast, an article touting the benefits of a particular company or exchange-traded fund could imply that it is overloved.
Even more telling is when a more generalized publication (such as Time, Vanity Fair, People, etc.) devotes its cover to an investment-related issue. When a financial story makes headline news in a periodical that reaches a broad base of the reading public, it is likely old news. In other words, by the time a story has become so mainstream that it lands on the cover of a major news publication, everyone who will be taking investment action based upon the news will likely act very soon. The news itself will quickly become outdated, if not erroneous.
It is important to note that these publications are not lacking in quality content. But they are in the business of reporting news, not necessarily forecasting. Given the market tends to discount future events, much of what is being reported has already been factored into the stock by the bigger market players. This is important to an investor, as you want to buy and sell stock based on what you expect in the future, not based on what has already occurred.
Before acting on a cover story, it is important to get "permission" to act in a contrarian manner by checking with other indicators. For example, if there is a bullish cover story on an equity, and not long after the stock moves below its 50-day moving average for the first time in half a decade, it is quite possible a major turning point has occurred and a longer-term trend in the opposite direction is underway. Or, there may be a fundamental catalyst that offers the impetus to take a contrarian stance. For example, after stock XYZ is featured on a major magazine cover bearishly, and the company subsequently releases a stronger-than-expected earnings report, the change in the fundamentals may provide an opportune moment to take a contrarian stance in anticipation that a sustained trend in the opposite direction is imminent.