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A series of educational trading
lessons and tips designed to help you become a better trader. The course material
will range from beginner to advanced depending upon the lesson.
This Issue's Lesson:
The Value of Magazine Covers as a
Contrary Indicator (5/25/98)
Traders are continually trying to get a jump on the competition in
determining the next market trend. They spend thousands of dollars on advisory services,
software, and trading systems in their search for the holy grail of trend predicting. New
indicators are written each day that are promised by their authors to be 100% accurate in
predicting the market's next move. NEWS FLASH--there are no holy grail methods of trend
prediction and there are no indicators that can be used by themselves to 100% predict the
market. In short, there are no easy one step methods to tame the market madness.
However, using everything that you know about the market can help you gain an edge over
traders who are blindly searching for that can't miss easy solution. One of these tools or
indicators in your market knowledge toolkit that you can employ comes not from some some
fast talking salesman promising riches if you use his system, but from your corner
newsstand.
The covers of national news magazines and general interest business publications can often
be employed as a contrary indicator. The reason news magazines are such good contrary
indicators is that magazines report on what has already occurred. Stocks are valued on
expectations for the future, not on past events. Generally the events that a
magazine reports on have already been priced into the stock when the article appears. A
general interest publication will try to emphasize stories that will be of the most
interest to its readers. Thus if a company or stock market is doing extremely well or
extremely poorly, the magazine will report on the current performance or sentiment
towards that company. When performance or sentiment reaches extreme levels is
usually when the magazines will feature cover stories on the company or market since this
is what is currently important news. When a trend has been in place for a long period and
most market participants have been converted to a belief in its continuance it usually
means that a peak or trough is at hand. All buyers or sellers have already used all
of the resources that they are willing to use to keep the trend in place.
There is no one left to convert to the trend's cause--sentiment in the trend's
direction is at an extreme.
Thus when you notice
several business magazines doing extremely positive or negative cover stories on a company
or market it is often an indication that the trend has reached its extreme--i.e. a top or
bottom. Everyone already knows about, and has participated in, the trend. Prices will
often reverse at these moments of extreme sentiment. As an example, the best time to buy
Latin American markets was in early 1995 when news coverage of Latin American bourses was
uniformly doom and gloom. People who bought at this time of extreme negative sentiment and
negative news coverage profited handsomely as this extreme of negativity marked a
bottom.
Try to look at the media's coverage, and when you
notice it is at an extremely negative or positive level, then think about using the
magazine cover phenomenon as one of the indicators that helps you discern trend changes
before the crowd. NEVER rely solely on just this indicator or on any other indicator as
your sole method of determining buying or selling opportunities. You must have a tool
chest of methods that you use as part of an overall cohesive, well planned market
strategy.
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1998-1999 Tulips and Bears LLC.
All Rights Reserved. Republication of this material,
including posting to message boards or news groups,
without the prior written consent of Tulips and Bears LLC
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Last modified: April 02, 2000
Published By Tulips and Bears
LLC
