Fake Crash News

ASX sheds $27 billion in global sell off

Market jitters set off $27bn plunge

Bleak outlook for Australian equities as market gravity shifts north

The market plunge headlines (it’s always ‘plunge’ isn’t it?) have come and gone this week, and where are we?

Well, roughly down 100 points from the start of the week. That’s a ‘whopping’ 1.7% in the red. Which is the same level we were at in January this year.

Is that good? Of course not. But it’s hardly disastrous.

Yet if you read the papers over the past few months, you would think that we are already in a recession, such is the doom and gloom out there.

Fund managers are throwing in the towel, the financial press are calling a crash, the government’s a mess, the deficit is growing, property prices will fall, interest rates are going up (or down)…in short, the sky is falling in.

Which made me think…

Is the news a contrarian indicator?

This is not a new idea.

One of the most famous cases was Business Week’s ‘Death of Equities’ cover in 1979, just before the start of the great multi-decade bull run in equities.

In fact, I found an article in The Economist from late last year that contained some Citigroup research on this very thing.

The premise behind the indicator is that when a journalist or editor finally devotes a cover to a market trend, company, country or person, the story or theme has been in vogue for some time and is likely past its peak.

Positioning and sentiment should already fully reflect the story on the cover of the publication and the story should be fully priced in.

In other words, by the time a journalist writes about the trend, a majority of the move has already happened.

The two Citigroup analysts looked at front cover headlines from The Economist from 1998 to 2016 that either took an optimistic or pessimistic outlook.

The results were very interesting.

They found that over a 360-day time period, 68.2% of the results turn out to be contrary to the headlines.

Buying the asset when the headlines are bearish would have resulted in an 18% gain over the following year. Shorting the asset (betting on the prices falling) when The Economist were bullish would have resulted in a 7.5% return.

Interesting indeed…

Don’t believe everything you read

There’s an old saying in poker.

‘If you’re playing poker and after five minutes you don’t know who the patsy is, you’re the patsy…’

The patsy in this case is the mug punter who loses money to everyone else.

And it turns out the patsy in the game of investing is the investment herd, through the mainstream press.

Mass emotional manipulation is a tool used by a lot of big financials players to get the market to move in a direction beneficial to their own interests.

Remember, they have big positions to shift. They need liquidity to take the opposite side of where they really want to invest.

With a strategically placed investment note here, an interview there. It’s not that hard to keep news hungry journos satisfied with few well-chosen titbits…

So, next time you read a strongly negative headline such as how Amazon is going to destroy Aussie retail or how oil is going to stay low for the next decade, maybe the smart thing to do is to start looking for buying opportunities in just that sector.

And if the mainstream consensus is adamant that market is about to crash, perhaps it’s time to go aggressively long.

Vice versa as well, of course.

There’s no point being contrarian just for the sake of it. But it’s definitely a great place to start your hunt for investing opportunities.


Ryan Dinse,
Analyst, Money Morning / Markets & Money

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

Money Morning Australia