The Magazine Cover Indicator

In August 1979, BusinessWeek ran its famous “Death of Equities” cover. The bull market began three years later (to the day).
Now three finance professors have looked at the impact of magazine covers on stock prices. As you might guess, it’s a contrary indicator:

A recent article in The Financial Analysts Journal by Thomas Arnold, John H. Earl Jr. and David S. North, all finance professors at the University of Richmond, called “Are Cover Stories Effective Contrarian Indicators?” offers an intriguing finding.
The professors look at how a company’s stock responds to a cover story in BusinessWeek, Fortune and Forbes. They find that positive stories follow periods of positive performance and negative stories follow periods of negative performance, which admittedly is not too surprising. More interesting, they also find that the appearance of a cover story tends to signal the end of the abnormal performance. Hence, individuals who trade on such “news” are not likely to do well.
This is not to say that articles in the financial press are not worth reading. Quite the contrary. They often provide insightful reporting and in-depth analysis. But by the time the articles have been researched, written and published, they are no longer news — the market price of the stock already reflects the company’s future prospects.
Taken together, this research offers yet more support for the time-tested investment strategy of buy and hold. Anything that you think is news is old hat to the professionals. Trying to outguess the market is a sucker’s game.

Posted by on May 3rd, 2007 at 10:33 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.