The Best Market Indicator Might Be Sitting On Your Bedside Table

In some industries – fashion, music, entertainment – being featured on the cover of a major magazine and touted as “the next big thing” would be seen as a reliable sign that you’re on the rise. In markets, well, that’d be the end of your run. And, look, I’m not even being cynical. Magazine covers just happen to be one of the world’s best, most predictive, time-to-do-the-opposite, contrarian indicators. Here’s a fun look back at the history – and how you might turn all those subscriptions to your advantage.

How does the magazine indicator work?

It’s simple: when an investing trend becomes big and well-known enough to be splashed across the cover of a major magazine, it’s usually just about reached exhaustion. I mean, it’s happened time and time again. The smart move, then, is to bet against the trend. Yep, those glossy covers can suggest more than just a good read – they can signal that it’s time to zig, while everyone else zags.

Just look at some of the greatest hits of this indicator. The cover of BusinessWeek in 1979 boldly proclaimed it “The Death of Equities”, just before a roaring bull market. The Economist hit the newsstands with its “Brazil Takes Off” cover in late 2009, right before Brazilian stocks nosedived, and followed up with “Brazil’s Fall” in 2016, just before they recovered. And don’t forget its 2003 cover, “The End of the Oil Age”, when crude was a mere $25 a barrel and soon began its yearslong rise to $145.

These magazine moments are more than just quirky coincidences; they’re a window into market sentiment at its peak – which itself is a hint that a reversal could be just around the corner. And, okay, not to pick on The Economist (it’s actually my favorite magazine) but its cover stories on oil would have made you a fair bit of money over the years if you’d just bet on the opposing view.

The Economist’s covers on oil could have been used as valuable contrarian signals. Source: Kaiser.Partner

What makes this indicator so reliable?

It boils down to the market’s forward-thinking nature, good old supply-and-demand dynamics, and a bit of behavioral psychology.

Markets are forward-looking. Investors are always trying to stay ahead of the game. So current prices mostly aren’t about what’s happening now; they’re more about what might happen next. And by the time a price trend hits the cover of a big magazine, chances are it’s old news to the market – it’s been there, done that. It’s the essence of the classic market mantra: “buy the rumor, sell the news.”

Behavioral biases exacerbate trends. Most investors don’t like to dine alone at the market’s big table. They follow the crowd (that’s called “herding bias”), project current trends far into the future (hello, “extrapolation bias”), and give too much weight to the latest news (yep, “recency bias”). All of these things can push prices away from their true value – and make for a sensational story. But as we all know, prices can swing wildly, but they eventually go back to a fairer value.

Supply and demand. If everyone’s bought into the market trend – as is often the case by the time it makes the cover of a magazine – there will be fewer folks around to buy in and push prices higher. And any whiff of skepticism about the trend could lead some investors to sell, tilting the balance toward the other side. It’s at that point that a sharp reversal is most likely – and dangerous.

This phenomenon isn’t unique to finance. Think of sports stars on the cover of magazines often experiencing a performance dip soon after. It’s all about mean reversion – the idea that what goes up often comes down – and overstretched sentiment, perfectly captured by a story making it to the front page.

Is this all a bit anecdotal or is it really predictive?

Trader and author Brent Donnelly put this indicator to the test, using The Economist’s covers. He zeroed in on clear, market-driven cover stories, skipped single-stock articles, and tracked the performance over the following two years.

What he found was mind-blowing:

Taking a bullish, or long, position on assets featured as part of a bearish cover story proved profitable – almost immediately. There’d be, on average, a 1% gain after a month, in 59% of cases. And the longer the wait, the better it got: an 8% gain in six months, 13% in a year, and a whopping 18% in two years. Put more simply, it worked well at identifying big turns in big trends, at the right time.

It gets better: the indicator was even more effective in the reverse – meaning, in cases where you’d take a bearish, or short, position after a bullish cover story. And that’s pretty surprising, because markets usually trend upward over time, making reliable short-side signals hard to come by. The bear signal did also work on average, but it got most of its calls wrong in the first three months. After six months, however, it made the right call 60% of the time, with 9% and 8% gains over six months and one year.

Going long the bearish covers and short the bullish ones would have been profitable. Source: Brent Donnelly.

In simpler terms, if you take a position against The Economist’s cover story, you might be looking at a 10% gain in your investment over the next year – regardless of whether it’s on the long side or short side. So, yes, the magazine cover indicator really does seem to work.

And to be clear, the fact that this indicator works doesn’t mean The Economist is getting things wrong: these articles aren’t necessarily making market predictions, so much as covering the big, screaming trends in markets.

What’s the opportunity, then?

AI and tech stocks might immediately spring to mind here: they’ve been all the rage for markets for the past year. But I haven’t seen this theme pop up on The Economist’s cover just yet, so sentiment may not be as bubbly as the price action might suggest.

However, this indicator would have recommended a few other interesting contrarian investment ideas over the past six months. It would have had you buying long-term Treasury bonds (as a contrarian play on inflation), snapping up Chinese assets, going bullish on the global economy and global stocks, and shorting Live Nation Entertainment to fade Taylor Swift’s being named “person of the year” by Time magazine. Not all of those bets have been performing well, so if you believe in the indicator’s long-term ability to call tops and bottoms, you might still be able to nab a decent price.

The indicator’s most recent hot pick would have you short Chinese EV maker BYD, (after The Economist’s January cover: “China’s EV Onslaught”).

Recent results of the magazine cover indicator. Source: Brent Donnelly.

Now, let’s go over an important caution point. Contrarian strategies tend to work best at extremes, meaning you probably won’t make money by betting against something just because it’s popular. And a magazine cover is just one possible indication that sentiment has reached an extreme, and it’s by no means not the only one. So you may consider looking at things like actual positioning data, or Google trends, to confirm what’s going on.

The magazine indicator can be useful as a tactical trading signal, sure, but it’s also a reminder about the bigger picture and the value in a contrarian stance. It sheds light on the fact that the crowd isn’t always right – as we’ve seen with stocks in the past couple of years, and with the bitcoin dips that happen after every big product launch.

It’s all the same story: the more popular a financial prediction becomes, the less likely it is to come true. And when everyone overwhelmingly agrees on something, you should probably take that as a warning sign. So keep a close eye on those magazine covers…