I came across an article detailing about how magazine covers are often wrong on market or asset class direction.
The explanation given is that a market move has been quite pronounced in order to make it to the magazine cover. Something that is overbought or oversold has the tendency to revert to the mean, and hence magazine covers become good contrarian indicators – when the cover is bearish = buy. The reverse is true too.
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The study avoided single name stocks as well as discarding ambiguous titles that don’t suggest an obvious contrarian trade.
The performance is evaluated between 1 month and 2 years later.
The author found that The Economist, my favourite magazine, had more negative (37) than positive (23) ones. Time magazine contributed another 8 covers for the study.
The results were interesting. If you make a contrarian buy to a negative cover, your average 1-year return was 13% or higher at 18% if you held the positions for 2 years!
If you make a contrarian short to a bullish cover, you would have made 9% in 6 months on average and 8% if held over a year. But 0% if over 2 years.
It appears to me that extremely bearish magazine covers work better for contrarian trades.
If so, let’s look at the recent The Economist covers and see if we can find anything bearish.
On 28 May 2022, The Economist cover displayed Xi Jinping walking down a bar chart and titled “China’s slowdown – The trouble with Xi’s new economic model”. The timing was immaculate as many China stocks rallied double digit percentages ever since.
On 21 May 2022, The Economist featured a photo of wheat and titled “The coming food catastrophe”. Wheat price has came down about 7% since 23 May 2022.
Let’s give an instance where The Economist was right. Hey, we can’t be biased right? On 12 Feb 2022, The Economist’s cover said “When the ride ends – What would happen if the markets crashed?”. Well, the S&P 500 ETF did fall about 6% from that point.
Let’s end off with the last cover on 22 Jan 2022. The Economist titled “Big tech’s supersized ambitions”. This would have been a highly profitable contrarian trade.
Notably Meta has declined 36% since 24 Jan 2022, which included the one-day 26% drop due to poor quarterly results.
The rest of the big tech were not spared – Apple -8%, Microsoft -8%, Alphabet -10%, Amazon -15%.
I love reading The Economist for the stats and analyses. I may or may not agree with the views but it gives me more a deeper understanding and wider perspectives about the economy, markets and businesses.
The lesson here is not to get influenced by the magazine’s directional bias when reading it. Especially the bearish ones.
