media - sentiment

Stocks & Commodities V. 7:10 (336-339): The best trading indicator- the media by Grant Noble

The best trading indicator- the media by Grant Noble

Anyone who has studied technical analysis knows that what has been written about it stems from a

limited number of approaches. Most of the books, systems and seminars on the market boil down to 12 basic categoriesóoverboug ht/oversold, number theory, retracements, gaps, trends, chart formations, trendlines, cycles, spreads, flow of funds, seasonals and reports (see "A map for the trading jungle," Stocks & Commodities, March 1986). Only a handful of those depend on something other than volume, open interest, high, low, open and close. No wonder their results are depressingly alike and are not much different than using a simple moving average.

A few good publications concentrate on fundamental analysis, but they tend to retail in the $10,000-a-year range. One publication concentrates on the Commodity Futures Trading Commission's (CFTC) Commitment of Traders report to find out what the hedgers (the "smart money") are doing, but it only comes out once a month, so you are bound to miss many profitable moves.

Even "contrary opinion" has its drawbacks:

� It's a lagging indicator. Market letters are normally written Thursday afternoon. By the time most "contrary opinion" services tabulate them, it's a week later.

� Markets can stay overbought or oversold for weeks causing large equity strains. One market service lost most of its gains for the year in an overbought future that continued up.

� Long or short term? A contrary opinion to buy or sell doesn't tell you whether it is time to pile on and pyramid or whether it's just a scalp against the trend.

� Enough people following any technique will ruin it. When you read statements in market letters like, "Charts are bullish, but contrary opinion is too high...," this indicator may be too good for its own

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good.

Media indicatorsI believe there is a market sentiment indicator that is more accurate, timely and better able to give long-term predictions. The American media gives you three indicators:

� Long-term. The "popular press" (such as Time, Newsweek and the TV networks) normally have major front-page articles on financial markets at the top or bottom of long-term market moves of many years. Then they go back to Madonna....

� Intermediate. The business weeklies (Barron's, Forbes, Business Week) are great indicators of the next three months . Barron's in August 1987 had a front cover of a bull running away from frantic investors with the caption, "Is the Bull leaving you behind?" Right at the top, of course.

� Short-term. The business section of The New York Times and the regular features of The Wall Street Journal (especially the futures page) are great short-term indicators. Their front pages also are excellent intermediate indicators.

I don't know wh y the media is such a perfect "contrary opinion" indicator. It could be, in order to sell papers, it has to know mob psychology.

If you had time, it would be worth it to get all of these major publications, rate the information in terms of importance and according to short-, intermediate- and long-term signals. If you don 't have time for all this, you can still take advantage of the "media sentiment indicator" by spending a few minutes a day with The Wall Street Journal, The New York Times and Business Week.

Business Week's reputation as a notoriously bad predictor of trends has made it the butt of jokes, even among media whose track record is not much better (like Barron's). Most investors remember the "Death of Equities" article that came out in 1982, just in time for the greatest bull stock market in history.

Business Week is still at it today, giving predictions that are amazingly, uncannily bad. I could give literally dozens of examples, but here's one of the latest. In the May 8,1989 issue, an article called "Gasoline prices pump up" described the tremendous demand for gasoline and the terrific profits by refiners. On the very day this came out (May 5, 1989), the premium of gasoline to heating oil peaked near 22 cents. This ratio neared zero in early July 1989.

More great intermediate indicators are the front pages of The Wall Street Journal and The New York Times. In September 1985, The Wall Street Journal had a front-page article predicting a collapse in oil. Oil did collapse, but not before it rallied $7 by December 1985 (Figure 1).

Just this January 22, the front page of The New York Times headlined, "Drought in midwest persists, imperiling crucial wheat crop. " Wheat fell 40 cents in the next few weeks and has not been consistently higher since (Figure 2).

Required readingIf I had only five minutes a day to read one publication, it would be the commodity page of The Wall


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Stocks & Commodities V.7:10 (336-339): The best trading indicator–the media by Grant Noble

FIGURE 1: September predictions of oil collapse were followed by a Decemberrally

FIGURE 2: Persistently lower wheat prices ignored January's drought head-lines.


Street Journal. There's an art to it, but once you get the hang of it, it will be must reading. If the commodity headline proclaims that a future "plunged," "fell sharply" or "tumbled," price is near a bottom. On September 9, 1987 the headline was "Crude oil tumbles below $19." Oil rallied sharply (Figure 3). Conversely, when silver "Climbed above $8" on September 11, it was reaching a peak. Extreme language is the key.

The Wall Street Journal sometimes "sponsors" a commodity with headlines that encourage investment but not panic. A classic illustration was a series of July 1987 stories on crude oil (Figure 3). July 7: "Crude oil over $21 a barrel." July 9: "OPEC raising prices—futures rebound." July 16: "Oil over $22 a barrel." July 17: "Oil prices rise 7th session in a row." When The Wall Street Journal uses mild language like "edges up," "rebounds," "rises," "continues advance," it's usually a sign that the move still has a ways to go. However, three or four "sponsoring" articles in the space of a few weeks is a sign of a top or bottom.

When the commodity page is devoted solely to one future complete with charts and "expert" predictions, a major countermove will occur.

On September 18, 1987 it was "Copper prices surge to 6-year high." Note the extreme language. The Wall Street Journal "experts" predicted .90 to $1.05 copper. Copper lost five cents the next two weeks (Figure 4). Copper finally did get over $1.05, but not before a sickening plunge the week of the stock market crash. Then the same "experts" were talking about a depression that would send copper prices to the tank. Copper, in all its perversness, hit $1.40 in December 1987.

Silence has a similar effect. When the commodity page talked about cotton, gold or anything but a "wildly plunging" stock and bond market during the first week of September 1987, it was a sure sign the down move in stocks and bonds was not over.

If this sounds like ancient history or coincidental anecdotes, consider the first week of May 1989. On May 1, the headline was "U.S. might decide against joining coffee accord." Bearish? Coffee proceeded to rally 12 cents in two weeks.

When I was a broker, I saw other brokers use a Wall street Journal article to "sell" a trade dozens of times. Even when the trade lost (normally most of the time), there was less anger and resentment among the clients.

On May 2, it was "Sugar swings widely, demand strengthens." An experienced Wall Street Journal watcher would note the bearish "swings widely" (investors like certainty) with the bullish "demand strengthens." Translation: It's a short-term trading range market with the long-term trend still intact (a "sponsoring article" for the bullish trend).

On May 4, The Wall Street Journal gave us a double barreled story. Page C1 featured an article called "Soviet appetite for grains is growing" that continued on the commodity page. Oh, I almost forgot about the front-page graph of Kansas city hard red wheat. Need I say grains have been down in recent months with Kansas city wheat particularly hard hit (Figure 5)?

Finally, after a dollar rally, The Wall Street Journal's May 5 futures page headline was "Petroleum




FIGURE 3: Extreme language invariably signals that a peak or a bottom is athand.



FIGURE 4: Copper prices repeatedly ignored "expert" predictions during thelast half of 1987.

FIGURE 5: The touted Soviet interest in wheat did not pan out in higher pricesfor grains.


prices...climb." Time to take profits. In spite of the major May 3 story, petroleum still remained a good buy on dips. The long-term trend was still up.

InterpretationI hope this whets your appetite for the "media sentiment indicator" and how it can apply to your trading. As the May 3 and May 5, 1989 crude oil headlines show, you still have to interpret the articles without blindly following the rules I've laid out. There can be tricks in interpretation.

For example, on June 14,1988, The Wall Street Journal had a front-page story titled "Killing drought." The article didn't focus on the farmers, but on inflation fears. Even the headline talked about the "slow burning progress" of the droughtóno panic to buy soybeans here. Corn and beans continued to go up, but gold prices soon after this began their descent. The "inflation scare" of 1988 had reached its peak.

The Wall Street Journal finally put in the grain top on July 14, 1989, with a front-page article that screamed "Corn...ravaged," "panic," "dust bowl."

When I was a broker, I saw other brokers use a Wall Street Journal article to "sell" a trade dozens of times. Even when the trade lost (normally most of the time), there was less anger and resentment among the clients. Didn't the great Wall Street Journal say it was so? "At least I went down with the best," the client would rationalize.

I don't know why the media is such a perfect "contrary opinion" indicator. It could be, in order to sell papers, it has to know mob psychology. Perhaps "insiders" feed them stories to create frenzies to unload positions. All I know is watching the media is the simplest, most effective indicator there is . It's also a lot cheaper than the latest $1,000-a-year "can't miss" system, market letter or seminar.

Grant Noble publishes the Media Index service from Lake Forest, IL, (312) 615-0249.

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