Why magazine covers can be useful warning signals

Timing the market isn’t easy. That’s why we generally prefer to take a ‘value’ approach. Buy things when they’re cheap, and eventually you should profit when the market revalues them.

But if you want to get a sense of when turning points might be approaching, sentiment indicators are worth looking at. These are about getting a feel for the mood of the market and investors. Usually, when investors are getting too gloomy or too confident, the market will do the opposite of what they expect. My colleague David wrote about some of the more market-oriented ones in today’s Money Morning: Three signs that stocks are about to start sliding again.

But another pretty decent indicator in the past has proven to be magazine covers. Classic examples include The Economist’s Drowning in oil cover from March 1999 (when oil was around $10 a barrel), or BusinessWeek’s Death of equities cover from 1979 (when the Dow Jones was at 800).

These aren’t necessarily signals to rely on for short-term trading. But they can give you a good idea of what the mainstream is thinking. And usually, if an idea is dominating the mainstream, you want to be on the opposite side of that idea.

So I was fascinated to receive this week’s Newsweek into the office. The cover: all black, with the words “Is that all?” stamped boldly across it in white. The content is mainly dedicated to talking about how the recession wasn’t as bad as we’d all expected, and how everything’s basically going to be OK and how the future won’t be that dissimilar to the past.

There are a lot of smart people writing in the magazine. But I’ll wager that the answer to the question “is that all?” is a resounding ‘no’. And to see it plastered across the cover of a widely-read magazine makes me all the more convinced that next year will be a lot tougher than most of us expect.