Facing the Market's Music: The Mother of All Contrarian Indicators?

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Facing the Market's Music: The Mother of All Contrarian Indicators?
Was the extraordinary Facebook hype a sign of unfriendly market days ahead?

By Bob Stokes
Wed, 23 May 2012 17:00:00 ET

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After a flat first day (May 18), the most hyped internet IPO in history actually fell down. And not only couldn't it get up, it kept falling for two days.

By the May 22 close, Facebook's share price had tumbled 18.4 percent from its $38 open.

Today's marginally higher close aside, there's been no honeymoon thus far for founder and CEO Mark Zuckerberg. Falling share prices have been joined by NASDAQ trading problems, and now financial regulators are investigating the IPO process. Reuters says (5/22) "Regulators plan to review allegations that Morgan Stanley shared negative news before Facebook's initial public offering with institutional investors."

Yet the bigger story goes beyond a rough start for Facebook: the market has lately been unfriendly to several social media stocks. Take a look at this chart and commentary from the May 18 Short Term Update:

In a critical divergence between the hype of each new social media IPO and the performance of each stock once it comes into the public sphere, most new social-media issues have hit the skids. As [the above chart] shows, four of the more popular recent IPO's are all down from their initial trading price. We suggest that shortly, a big down arrow may be placed on a chart depicting Facebook's share price.

Short Term Update, May 18

Indeed, the arrow did point down for Facebook's share price on May 21 and 22.

In truth, the Facebook IPO faced a headwind, namely the several previous weeks when the entire stock market had already been heading south. And about a month before the May 1 market top, the April 2012 Atlantic magazine cover proclaimed Fed Chairman Ben Bernanke "The Hero."

Should investors consider such events as contrarian indicators?

Paul Montgomery of Universal Economics estimated long ago that the “magazine cover indicator” tends to presage a market’s turn about a month later. Such an estimate is highly approximate when assessing real-time events, but it may serve us as a general guide for expectations.

Elliott Wave Theorist, March 2011

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Tags: cultural trends, Elliott wave, investor psychology, Magazine Cover Indicator, Nasdaq Composite, Traders, trading lessons

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