Are Screaming Headlines a Sign of the Top?

Wednesday, 06 Feb 2013 07:38 AM

By Patrick Watson

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The U.S. stock market started 2013 strong. No question there, but some in the media got a bit too enthusiastic last week. Here are two examples for you.

Example 1: On the last day of January, a story in The Wall Street Journal was titled “A January For The Ages Bodes Well For Stocks.” Yes, it was a strong month, but I really doubt anyone will be talking about it a century from now.

The story, written by Steven Russolillo, was actually quite good. He reported, correctly, that markets have historically done well in years with a positive January. Someone else probably wrote the headline. The scary part is that a publication like The Wall Street Journal has headline writers who think “A January For The Ages” is correct, and editors who allow it.

Example 2: At Barron’s (which, like The Journal, is published by Dow Jones), the Feb. 2 cover story was (in bold red letters) “STOCK ALERT! Get Ready For A Record On The Dow.”

Now perhaps it was just a ploy to sell more issues to supermarket shoppers, but I get very nervous when major publications start sounding so frantic. It’s a sign that sentiment is getting way too bullish.

Lest we forget, newspapers and magazines are not in business to inform readers, but to please advertisers. They do this by attracting eyeballs.

Since their top attractions are headlines and cover art, the people who design those components are experts at gauging public opinion. They know what sells. Their judgment right now is that the public wants to be bullish.

Sign of a top? Maybe, but sentiment can be tricky. Bull markets end when buyers, thinking it’s too late to get aboard, stop buying. There’s still plenty of buying power out there.

On the other hand, since 2008, the public has learned a hard lesson on leverage. So have banks. I don’t think we will see people using home equity loans to buy stocks. So the buying power may be less than we think.

The top is no doubt closer than it was a month ago. But whether it is here now, or way in the future, is something no one knows for sure. Don’t let screaming headlines convince you otherwise.

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