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WELCOME TO TULIP U.

Contributors Wanted --If you are interested in having your articles featured in Tulip U. contact us for details at tulipu@tulipsandbears.com. Articles must be of an educational nature and deal with one of the following topics: Technical Analysis, Market Psychology, Options Trading, or General Trading Tips and Tactics.

CLASS IS NOW IN SESSION

A  series of educational trading lessons and tips designed to help you become a better trader.  The course material will range from beginner to advanced depending upon the lesson.

This Issue's Lesson:

The Value of Magazine Covers as a Contrary Indicator (5/25/98)

    Traders are continually trying to get a jump on the competition in determining the next market trend. They spend thousands of dollars on advisory services, software, and trading systems in their search for the holy grail of trend predicting. New indicators are written each day that are promised by their authors to be 100% accurate in predicting the market's next move. NEWS FLASH--there are no holy grail methods of trend prediction and there are no indicators that can be used by themselves to 100% predict the market. In short, there are no easy one step methods to tame the market madness.  However, using everything that you know about the market can help you gain an edge over traders who are blindly searching for that can't miss easy solution. One of these tools or indicators in your market knowledge toolkit that you can employ comes not from some some fast talking salesman promising riches if you use his system, but from your corner newsstand.

    The covers of national news magazines and general interest business publications can often be employed as a contrary indicator. The reason news magazines are such good contrary indicators is that magazines report on what has already occurred. Stocks are valued on expectations for the future, not on past events. Generally the  events that a magazine reports on have already been priced into the stock when the article appears. A general interest publication will try to emphasize stories that will be of the most interest to its readers. Thus if a company or stock market is doing extremely well or extremely poorly, the magazine will report on the current performance or sentiment  towards that company.  When performance or sentiment reaches extreme levels is usually when the magazines will feature cover stories on the company or market since this is what is currently important news. When a trend has been in place for a long period and most market participants have been converted to a belief in its continuance it usually means that a peak or trough is at hand. All buyers or sellers have already used  all of the resources that they are willing to use to keep the trend in place.  There  is no one left to convert to the trend's cause--sentiment in the trend's direction is at an extreme.

    Thus  when you notice several business magazines doing extremely positive or negative cover stories on a company or market it is often an indication that the trend has reached its extreme--i.e. a top or bottom. Everyone already knows about, and has participated in, the trend. Prices will often reverse at these moments of extreme sentiment. As an example, the best time to buy Latin American markets was in early 1995 when news coverage of Latin American bourses was uniformly doom and gloom. People who bought at this time of extreme negative sentiment and negative news coverage profited handsomely as this extreme of negativity  marked a bottom. 

Try to look at the media's coverage, and when you notice it is at an extremely negative or positive level, then think about using the magazine cover phenomenon as one of the indicators that helps you discern trend changes before the crowd. NEVER rely solely on just this indicator or on any other indicator as your sole method of determining buying or selling opportunities. You must have a tool chest of methods that you use as part of an overall cohesive, well planned market strategy.

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Last modified: April 02, 2000

Published By Tulips and Bears LLC