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Monday
Aug202012

Drudge Headline Indicator Surges to New High Then Pulls Back

The Drudge Report, with its 30,000,000 page views per day, is probably the most widely followed news source on the web.  The Drudge Report is not a financial news site, however, so when a financial news story grabs the Drudge headline, it means that the story has crossed over from just a financial news story to a mainstream news story.  And when a financial news story crosses over into the mainstream media, it means that those that don't follow the market on a regular basis are suddenly following the market.  This almost always occurs when the market (or economy, etc.) is going down and not up.

A little over a year ago last July, we created the Drudge Headline Indicator, which counts the number of days in which there has been a financial related Drudge headline over a rolling 50-day period.  Looking at the chart below, you can see that peaks in the Drudge Headline Indicator have coincided with bottoms in the stock market over the last few years, making it a contrarian indicator as you would think.  Unfortunately, you can't tell that a peak has occurred until after the fact, but once it starts to move lower, the market starts to move higher.  

Late last summer, the economy and the stock market were front and center in the mainstream newsflow, because markets were roiled and sovereign debt problems in Europe and beyond were popping up on a daily basis.  At its peak last August, there was a financial headline on Drudge on 22 of 50 days, which was higher than the high reached even during the 2008/09 financial crisis.  But just as we saw following its peak in early 2009, the market bottomed and took off following the indicator's peak last August.

So where does the Drudge Headline Indicator stand now?  As shown in the chart, this June, the indicator reached the highest level we've ever seen at 24 (24 of the prior 50 days).  This came right when Europe and the US were hitting their summer lows.  The indicator is currently well off its highs now that the market is moving higher once again, but at 14, it still has room to fall.  

We've now seen two periods where the Drudge Headline Indicator has eclipsed its highs from the financial crisis, when things were much much worse than they are today.  In our view, the financial crisis was a game changer that has caused the mainstream media and the average reader to follow the market more closely.  The reader is also much more skeptical of any rallies because of the damage that two 50%+ declines over the last ten years has done.  And every time the market has a little correction, thoughts of 2008/09 still creep into the minds of investors.  It's likely going to take quite a long time for market sentiment to return to pre-crisis levels, and for bulls, this is a good thing.  As we said in our original Drudge Headline report, the market climbs a wall of worry, and when investors become too confident that things are all fine and dandy, it's usually time to sell.  Fortunately, an overconfident investor is still a long way off from now.

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