Beautiful plumage.

Investment Signals in a Magazine Cover

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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One of the more infamous and misunderstood market signals is the magazine-cover indicator. Created by Paul Macrae Montgomery, this contrary indicator essentially tells us when some investment theme or fad has reached a crescendo. The thinking goes that by the time the editors of Time find out about some hot investing trend, it is all over but the crying.

As Montgomery described it, there are three primary rules for the classic magazine-cover indicator. First, it must be a mainstream -- not business -- publication that put a specific object on its cover. Second, we are looking for a well-understood concept that is reaching a climax. And third, there must have been significant asset-price gains leading up to the cover.

As an example, consider the past 30 years of Time magazine covers as they relate to the stock market. When Time named Amazon.com chief Jeff Bezos as Person of the Year in December 1999 it marked the near top of the dot-com bubble. Nor did it do Mark Zuckerberg -- or Facebook shareholders -- any favors either by bestowing the same honorific on him in 2010. Back in 2005, Time gave top billing to housing. We know what followed.

And, it isn't just Time magazine, but any non-business publication. The thinking is that by the time editors at general news publications notice that an asset class has become hot, there are few suckers left to come in to drive prices higher. Consider this New York Times Magazine cover on gold in 2011 as yet another example.

And before you start selling shares of companies that end up on covers, you should know that the indicator isn't really applicable to individual companies, as Apple will attest. Bezos and Zuckerberg were emblematic of their respective sectors -- dot-coms and social-media networks -- not necessarily their individual companies.

These covers identify the psychology of when something has become "overbought" in societal terms. When an investing theme has become so widespread it has even reached the editorial committee of Time or Newsweek, it is usually at the end, not the beginning of its run. The goal is to identify when a fad hits its peak, and is about to reverse. We have even seen variations of this in terms of consumer beverages and political memes.

Which brings me to the recent cover of the Economist magazine. It features a dead parrot, a reference to the hilarious Monty Python dead parrot sketch. In that classic bit of Pythonesque madness, an obviously deceased bird "is no more. It has ceased to be. It's expired and gone to meet its maker . . . This is an ex-parrot."

The reference is to the policy errors now manifest in Europe, specifically German fears of inflation when deflation is the more pressing and imminent threat, is the deceased bird. On the cover, we see Chancellor Angela Merkel, making the observation of region's economy, like the dead parrot, that "It's only resting."

Apparently, inflation in Europe too is only resting, hence the German opposition to further stimulus.

Some folks have taken this as signal to jump back into European equities. I am skeptical of cover's value as a contrary indicator. Regardless of your views on Europe -- we have exposure to the continent through several exchange-traded funds -- the Economist cover shouldn't be your reason. While it does reflect both a trend that has run quite far and is widely known, it is on the cover of a business publication -- therefor disqualifying itself based on Montgomery's rules.

Perhaps the same could have been said of the most-infamous magazine cover of all: The "Death of Equities" on the Aug. 13, 1979, cover of BusinessWeek (then owned by McGraw-Hill, now part of Bloomberg LP). This isn't a perfect example, as it was yet another a business publication cover. Additionally, one could certainly argue, as the Wall Street Journal's Justin Lahart has, that the "August 1979 Business Week cover story wasn't quite as wrong as people remember. When it came out, the Dow Jones Industrial Average was at 867. Three years later, it was at 779. Adjust that for inflation, the Dow had fallen 32%."

Still, had you invested in the stock market then your returns three decades later would be impressive. Perhaps we will look back at this moment as a similarly opportune time to jump into European equities. Like the BusinessWeek cover, it too may also be a touch early.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Barry L Ritholtz at britholtz3@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net