By Arthur Levin
In mid May many of you likely put eyes upon the latest Barron’s cover, which read plainly, “This Bull has Room to Run” that may have been sitting directly next to the current “Wall Street is Back” cover from The Economist. In itself, magazine covers are not a call to action, but over the years they’ve aided in helping us maintain a more balanced perspective by forcing us to recall the contrarian utility of these covers.
Things are rarely as bad as the covers used to sell magazines at bottoms, nor as good as they would appear at tops. A few years ago a group of professors at the University of Richmond actually tried to put some numbers to this observation. They looked at headlines from Business Week, Fortune, and Forbes over a 20 year period. Of the 2080 cover stories they found, 549 were actually included in the study as they dealt with a particular public company for which the aftermath of the stock could be measured.
Of those 549 stories, the vast majority (350) were slanted to the positive side, while 99 were considered “neutral”, and 100 were “negative”. Keep in mind the time period was 1983-2002, which naturally lent itself to both bullish covers and bullish outcomes. At any rate, according to their research paper, “Are Cover Stories Effective Contrarian Indicators?,” Tom Arnold, CFA, John H. Earl, Jr., CFA, and David S. North found the following, “Statistical testing implied that positive stories generally indicate the end of superior performance and negative news generally indicates the end of poor performance.”
Relative Strength analysis has been telling us since late 2011 that US Stocks were the place to be. Isn’t it ironic that those guys are so late to the game?
At this time, our indicators continue to tell us that US Stocks are the strongest asset class.
This article was written by Dorsey Wright and Associates and provided by Arthur Levin, Senior Vice President – Investments, Wells Fargo Advisors, LLC, Beaufort, South Carolina, 843-524-1114.