The Economist magazine is known for many things, including thought-provoking covers on what’s happening in the global economy, markets and politics.
Aside from creating debate, those covers, according to Greg Marks and Brent Donnelly, analysts at Citibank, are also useful from another perspective: they’re often a contrarian indicator, pointing to a particular trend that’s been dominating financial markets that may be coming to an end.
“The Magazine Cover Indicator is a belief commonly held by financial market participants that when a financial story or market theme is displayed on the cover of a magazine, that theme or the related trend is near exhaustion,” the pair said in a note seen by Business Insider.
“In other words, magazine covers are believed to be reverse indicators.
“The premise behind the indicator is that when a journalist or editor finally devotes a cover to a market trend, company, country or person, the story or theme has been in vogue for some time and is likely past its peak. Positioning and sentiment should already fully reflect the story on the cover of the publication and the story should be priced in.”
This, says Marks and Donnelly, suggests that by the time a journalist writes about a trend, a majority of the move has already happened.
To back-test this theory, the pair looked at every cover story from the Economist going back to 1998, selecting those stories that covered “an emotional or hyperbolic portrayal of an asset class or market-related theme”.
In particular, they were looking at the following criteria:
- Does the cover clearly reference a market theme or asset class?
- Can an obvious contrarian trade be justified by this cover?
- Does the cover unequivocally make a strong statement on direction? In other words, does the cover have a strong bullish or bearish message?
In the end, excluding ambiguous covers which they left out of the study, they found 44 covers to test their theory.
The results were eye-opening.
“We recorded each cover that met these criteria and tracked the performance of the referenced asset over the next 3, 6 and 12 months,” they said.
“The results are interesting and strongly suggest that covers from The Economist are a reverse indicator.”
This table shows the results they uncovered, using a contrarian perspective:
While the results were mixed shorter term, looking at the asset price performance of a particular cover over a year-long basis, it suggested that not only were many of the covers contrarian indicators, they were more often than not profitable, particularly if the cover was bearish.
“The bulk of the reversal suggested by The Economist cover stories tends to happen 6 to 12 months after the magazine comes out,” the pair said, noting that “68.2% of all covers were wrong after one year which is a very high success rate for any indicator.”
This, they say, “concludes that unequivocally hyperbolic covers of The Economist provide a strong contrarian signal”.
“The next time you see The Economist playing up a market theme or saying XYZ is going to zero or infinity, be on high alert for a reversal.
“You now have solid empirical evidence that the hyperbole is probably a sign that the theme is nearly exhausted.”
While the analysis from Marks and Donnelly focuses just on the Economist, there are many other examples from other publications — including Business Insider — of commentary on a particular asset class that is performing well or poorly changing significantly over an extended period of time.
Indeed, one of the catch-cries of contrarians is the saying, “be fearful when others are greedy and be greedy when others are fearful”.