I’m a big fan of using cover stories as contrary indicators. (You can see previous examples I’ve cited by clicking here.)  The idea is that by the time an issue makes it to the cover of a publication it’s already widely discounted in prices and markets.  Barry Ritholz provides some rules for using magazine covers at his blog’s post here. I’m not sure mine, below, qualifies, but this is my sandbox.  Here are his rules, verbatim:

1. Mainstream–not business–publication
2. Well understood concept that is reaching a climax
3. Asset price gains

I’m not sure the last one is a requirement; first, asset price losses ought to suffice; second, if a cover captures the general zeitgeist among the populace, and that’s factored into asset prices, than a reversal or lifting of the subject–as the contrary nature of the cover story argues–ought to provide the contrary catalyst.

Anyway, here is this week’s cover from The Economist.

I happen to agree with the cover story’s angle, although I think I know the answer. Not that it’s relevant to this particular posting, but it has to do with the fact that the recent recession was accompanied by a financial crisis. In the past, that combination has lead to very subdued recoveries.Taken at its face value, the contrary angle would be that the economy’s weakness is priced into assets and any positive surprise would push risk assets quickly higher. 

Looked at only from the angle of Jane Consumer, I’d say this pretty well sums it up: this is just a lousy economy. Any surprise in the economic statistics–like a big increase in non-farm payrolls or, better yet, anecdotal stories about one’s neighbors (the closer to home the better)–could spur buying of stocks.

I think, however, that the tenor of professional investors has been much more upbeat, such that they might poo-poo this cover story by spinning things bullishly as they’re wont to do.

In conclusion I’ll put it this way.  Individual investors have not rushed to stocks. Thus, this cover story probably captures their mood pretty well, and if it’s the contrary indicator it appears to be, we might see individual investors return to stocks. But the professional investment class is far more important, and they’re already in, already bullish.

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The folks at The Economist are back at it.  Makes it look pretty hopeless, doesn’t it?

Magazine covers are contrary indicators.  They reflect the notion that, by the time the editor approves a cover story, he or she has to be convinced in his or her own mind that such a cover is going to boost readership.  That’s not likely until the popular conscience is on high alert.  And by that time the smart money is long gone.  In fact, the weak hands are just as likely to sell their shares to the smart money.

This isn’t to suggest that the problems with Europe are past, just that the performance of European investments might be set to reverse–at least for a while.  In fact, you should read the article, but the cover story should alert you to the possibility that now is not the time to bail out.  One should get a better chance to do that later.

Here’s a look at the EMU index.  The downtrend has been established since late 2009, and the index is off by 50%.

You might not have noticed it at first, but there’s a highlight on the front cover that bears a comment:  “Why gold has probably peaked.”  If that included some attention-getting picture and consumed the front cover, it would probably be a signal to go out and buy gold.  One thing that popular magazines are not good at doing is divining the end of a trend, and you could say that gold has been in a trend.  That The Economist thinks the trend is over is not likely to put an end to it.

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