Media Reports: An Indicator Worth Watching

Thursday, October 15, 2009

newspaper-4The challenge of successful investing is that most of what we read is too late. When the media catch hold of something, it’s usually already in the market prices. However, there is a benefit from reading the press reports: they can help us form a winning contrarian strategy – one that uses the current, popular beliefs to determine what could come next. A good example is the reporting of the Dow Jones Industrial Average crossing 10,000 yesterday. If we see hype and excitement, then we should get a bit worried about owning stocks. However, what occurred is a flood of lackluster and even warning reports…

Business Week started off the ho-hum reporting early, with an October 12 article, “Dow 10,000: Just Another Number?”

The 10,000 milestone is likely to garner big headlines. It would remind average investors that equities have achieved big gains since the market lows of seven months ago…. Wall Street veterans, however, are likely to greet the Dow’s achievement with a collective yawn.

The “big” headlines that followed reflected that yawn and skepticism with a big “but”. Here are samples:

NY TIMES: “A Dow Bubble? It Looks Like It – Investors have rejoined the 10,000 Maniacs”

The Dow has recovered about 3,450 points since bottoming out in early March. But it and other major stock indexes are still shadows of their former selves, and many investors are a long way from whole.

CNN MONEY: “Don’t trust Dow 10,000”

The stock market is supposed to be a leading indicator, predicting what happens next. But the rally doesn’t mean the nation’s economic woes are over.

FORBES: “Dow Tests 10,000. So What?”

The blue-chip index nears a round number, but it’s just an arbitrary line in the sand.

CHICAGO TRIBUNE: “Dow tops 10,000, but the thrill is gone”

Too many regular investors have lost too much in stock, housing collapses

Other articles implied the “but”…

BARRON’S: “Dow 10,000: Déjà vu All Over Again”

[But] Instead of partying like it’s 1999, investors are more paupers than princes after a decade of nil returns.

WASHINGTON POST: “The Dow Passes Mile 10,000 on Road to Recovery – [But] Joblessness in the way of future gains”

USA TODAY: “Dow hits 10,000; [but] can rally go on?”

Right after the Dow closed above the key milestone, the debate on Wall Street quickly turned to whether stocks can keep going up.

The Wall Street Journal went further, with two “buts.” They doubt the ability of the stock market to rise further, and they  question whether investor worry and cash holdings would provide an upside catalyst this time…

THE WALL STREET JOURNAL: “Dow at 10000 as Crisis Ebbs – A Rapid Recovery From Collapse, but Traders Voice Doubt About Bull’s Staying Power”

In Wall Street’s sometimes upside-down logic, skepticism about stocks can be viewed as a good thing in the short run. It means there are plenty of people sitting on cash, who might change their minds and shift that money into stocks — sending the market higher. But in the longer run, many of the problems that worry investors will need to be resolved, such as the high levels of bad loans and securities on bank balance sheets, the weakness of the real-estate market and the nation’s heavy consumer and government debt.

Bloomberg has it right in their usual terse style: stock market up, investors buy bonds.

BLOOMBERG: “Investors Favored Bond Funds as Dow Average Rallied Past 10,000”

As the Dow Jones Industrial Average posted its steepest advance in seven decades to rally above 10,000, investors were pouring money into bonds.

The important implication for us, supported by the reports above: there is little risk of stocks being overbought yet, and there is plenty of financial and psychological ammunition for more gains if the economy and earnings keep on track.

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