One of the things that people get wrong all the time is the contra meanings of magazine covers. This is a subject we have discussed for quite some time around here.
The assumption is that if something shows up on a mag cover, whatever the subject is must therefore be all over, hence, its time to go the other way. This is a fundamental misunderstanding of what the cover indicator is all about.
The short version is that when a long running trend, well represented by consensus opinion and stock prices, finally bubbles up to the front of a major magazine cover, THATS WHEN its very very late in the cycle. Hence, it is a contrary indicator.
A recent classic cover was the Time Magazine on Housing back in the summer of 2005. The timing was near perfect, as Housing peaked in August ’05. However, when something is relatively new, such as the US economic slowdown (see Economist cover below), it is not a true contrary indicator.
Let’s compare these two examples:
• Housing Boom
– Lasted almost 10 years
– Home prices increased 2 and 3 standard deviations from historical means
– Homebuilder stocks ran 500% to all time highs
• US Economic Slowdown
– (Un)Offically going on for less than 6 months; GDP still positive
– S&P 500 and Dow Industrials made all time highs six months ago
– Equities still within 10-15% of highs
– No consensus for a recession
When we compare these two quantitatively, the differences are pretty obvious as to which one is the true contrary indicator . . .
The Magazine Cover Indicator
Big Picture Overview
uh-oh: Time Magazine on Housing http://bigpicture.typepad.com/comments/2005/06/uhoh_time_magaz.html
The great American slowdown
Apr 10th 2008
The Economist print edition