Always darkest before the dawn

I thought you might find this (slightly edited) excerpt from a Time Magazine article interesting:

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IF AMERICA'S ECONOMIC LANDSCAPE seems suddenly alien and hostile to many citizens, there is good reason: they have never seen anything like it. Nothing in memory has prepared consumers for such turbulent, epochal change, the sort of upheaval that happens once in 50 years. That may explain why so many voter polls, taken as the economy shudders toward the November election, reveal such ragged emotional edges, so much fear and misgiving. Even the economists do not have a name for the present condition, though one has described it as "suspended animation" and "never-never land."

The outward sign of the change is an economy that stubbornly refuses to recover from the recession. In a normal rebound, Americans would be witnessing a flurry of hiring, new investment and lending, and buoyant growth. But the U.S. economy remains almost comatose. Unemployment is still high; real wages are declining. At a TIME economic forum last week, forecasters predicted that U.S. growth would amount to half the speed of a normal recovery. The current slump already ranks as the longest period of sustained weakness since the Great Depression.

That was the last time the economy staggered under as many "structural" burdens, as opposed to the familiar "cyclical" problems that create temporary recessions once or twice a decade. The structural faults represent once-in-a-lifetime dislocations that will take years to work out. Among them: the job drought, the debt hangover, the banking collapse, the real estate depression, the health-care cost explosion and the runaway federal deficit. "This is a sick economy that won't respond to traditional remedies," said Norman Robertson, chief economist at Pittsburgh's Mellon Bank. "There's going to be a lot of trauma before it's over."

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By the way, the article appeared in the September 28,1992 issue of Time. Thanks to Professor Mark Perry for the link.

America is back!

Here is the cover of the latest issue of Newsweek magazine. Does it have any significance for the contrarian trader?

In my book I emphasized that the goals of the contrarian trader are to identify stock market crowds as they form and to determine the point at which the crowd begins to disintegrate. I think this cover shows that the extreme bearish sentiment among stock market traders and investors that prevailed only 12 months ago has begun to lift. The bearish crowd of a year ago is well along the path to disintegration. And a bullish crowd may well be forming.

But if a bullish crowd is forming it still has a long way to go before its views dominate the U.S. stock market. This cover is one of the very first significant instances where main stream media are showing more optimism about the U.S. economy. I think economic optimism will eventually translate into stock market optimism (but note this cover doesn't mention the stock market explicitly).

So I conclude that if anything this cover is a buy signal for investors. It shows that a bullish stock market crowd is beginning to form but is still in its youthful stage. As the crowd matures stock prices will go higher. Near the bull market top I expect to see many more positive stories about the economy, and several stories about how well stock market investors are doing.

Apple Bubble

A pair of the latest magazine cover stories has caught the eye of Paul Montgomery, today's foremost practitioner of contrary opinion technique and the inventor of the magazine cover indicator. (You can read more about Paul on page 212 of my book.)

Above this post you can see images of the latest covers of Time magazine and Newsweek. They feature Steve Jobs and his latest product, the i-Pad. From his research on magazine covers Montgomery discovered that the appearance of a CEO or his company's product on the cover of a general interest newsweekly like Time or Newsweek is often associated with an important high or low in the company's stock. I discuss this magazine cover indicator on pages 92-95 of my book.

As you can see from its monthly bar chart Apple Computer (AAPL) has nearly tripled in price over the past year. It has been one of the leaders of the current bull market. But the two magazine covers above are warning us that public enthusiasm for Apple Computer has reached bubble levels. Montgomery has found that in this sort of circumstance the final high of the company's stock price follows the publication of the cover stories by about 4 months on average. On this basis we should expect AAPL to move higher for the next 3 or 4 months. But 12 months from now it is very likely that AAPL will be selling substantially lower that it is now.