Why This Wounded Bear Could Become a Bucking Bull

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Russia is a mess.

Plunging oil prices, a ruptured ruble, years of a corrosive “kleptocracy,” Western economic sanctions and an unprecedented flight of capital have teamed up to wrestle the Russian bear to its back in 2014.

No wonder President Putin’s bellicose blustering and military muscle flexing in East Ukraine via the annexation of Crimea now has rendered Russia an investment outcast.

Or has it?

If you’re a regular reader of The Global Guru, you’re likely already familiar with the concept of “buying when there’s blood in the streets,” attributed to 18th-century British nobleman and banking magnate Baron Rothschild.

The idea here is to buy into a stock market when that market is getting both literally and figuratively slaughtered.

Sure enough, this figurative slaughter of the Russian economy has now made it onto the cover of Britain’s The Economist magazine.

And thereby, investors have just received what I consider to be my #1 contrarian indicator.

The Folly of the Headline

Last year, I wrote about the remarkable accuracy of the contrarian indicator of a cover story in The Economist.

This contrarian indicator works because by the time the success or failure of a company, a sector or a country reaches the cover page of a major publication such as The Economist, the story is no longer news, and it already is reflected fully in the price.

So, if a headline screams about a “wounded economy,” my first inclination is to plant my own capital into that wounded tissue and then wait for it to bloom.

As it turns out, this “folly of the headline” is more than just a vague correlation or an unsupported thesis.

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In fact, a 2007 academic study conducted by three finance professors at the University of Richmond put the magazine cover story indicator to the test as it applied to coverage of individual companies.

The professors looked at headlines from publications such as Business Week, Fortune and Forbes over a 20-year period to examine whether positive cover stories are associated with superior future performance and negative stories are associated with inferior future performance.

Unsurprisingly, positive cover stories tended to appear following periods of robustly positive performance, while negative stories followed periods of poor performance. Specifically, the companies that received the most positive coverage had, on average, outperformed the market by 42.7%. Those companies suffering negative coverage, in contrast, had underperformed by 34.6%.

What’s more interesting is how these companies and their respective share prices outperformed after the cover stories appeared.

The essential conclusion of the study was that the most negatively portrayed companies managed to beat the market by an average of 12.4%, whereas the outperformance of the media darlings fell to just 4.2%.

What’s the lesson for investors?

Negative cover stories arrive on newsstands just in time for a reversal of fortune.

The Best Way to Ride Russia

Given that my #1 contrarian indicator is splashed front and center on the cover of The Economist, my “blood in the streets” olfactory sense gets overrun by the scent of an imminent bull run in stocks pegged to the country’s fortunes.

So, what is the easiest, most efficient way for investors to go long to tap a Russian market reversal?

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One great way to do so is with an exchange-traded fund (ETF) that holds the biggest, most heavily traded Russian-based stocks — the Market Vectors Russia ETF (RSX).

A look at the 52-week chart of RSX gives us a lot of information about that country’s volatile markets. In March, the shares fell to what was then a multi-year low as Russia annexed the Crimean region.

rsx1125

Then a buy-when-there’s-blood-in-the-streets rebound took shape that vaulted the shares back above key resistance levels in June. That’s a rebound subscribers to my Bull Market Alert trading service profited from when I had the audacity to recommend Russian stocks.

Those gains faded in July as another round of tensions in the region, after the downing of a Malaysian passenger jet by pro-Russian separatists, resulted in an even deeper sell-off in RSX.

Shares continued to tumble until mid-November, just as the editors at The Economist decided to make the country’s economy the subject of their cover story.

For blood-in-the-streets investors who like the idea of a contrarian setup, Russia is a compelling example right now.

And like clockwork, the latest data shows that a turnaround in RSX may indeed be in its nascent stages.

Last week, shares of RSX were up 3.6%, its largest weekly gain in nearly three months. In addition, RSX now is beginning to see capital return to its coffers. According to Bloomberg, traders added some $54.4 million in fund inflows to RSX in the week ending Nov. 21.

That’s what I call buying when there’s blood in the streets — and on the newsstands.

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In case you missed it, I encourage you to read my e-letter column from last week about the Nasdaq rally of the past decade. I also invite you to comment in the space provided below my commentary.

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