Conventional wisdom holds that magazine cover stories are contrarian indicators - by the time a company’s success or failure reaches the cover page of a major publication the story is so well known as to be completely reflected in the stock price. Therefore, all good news is priced in and the stock can only underperform or all bad news is priced in and the stock can only outperform.
While simplistic, the magazine cover indicator now has the support of recent academic research. This research did find that cover story headlines on Business Week, Fortune and Forbes tended to indicate that the mood (bullish or bearish) of the story was about to change in the market.
As a result of this research, I have decided to develop a portfolio of stocks based on using those three magazine’s covers as a contrary indicator. I also track this portfolio on StockPickr. This week’s results:
Business Week
Broken China
Beijing can’t clean up the environment, rein in stock speculation, or police its companies. Why the mainland’s problems could keep it from becoming the next superpower
Contrary Pick: Long China. Perhaps that is why China Life (LFC) made the Large Cap Watch List (Track at Marketocracy).
Fortune: How Gates conquered China
Or is it the other way around? On the road to Beijing with Bill Gates, who threw his business model out the window.
Plus, “The Greatest Economic Boom Ever!”
Contrary Picks: Short exposure to the US Economy, Microsoft (MSFT - Annual Report).
There has not been a new issue of Forbes since my last update.
