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Blanket Media Coverage May Signal Stock Has Reached Peak

Media hype can help drum up interest in the Super Bowl, a new TV show or some other event and boost interest and ratings.

But in the stock market, heavy media coverage is often a lagging indicator, kicking in after a stock has already enjoyed a big run.

Magazines like Fortune and Forbes typically run cover photos and profiles of companies or CEOs in part to satisfy their readers' interest in finding the secrets to success. That helps sell copies.

IBD's goal is to help investors find the next Apple (AAPL) or Microsoft (MSFT) before they become household names. When those companies start attracting widespread media attention, it's time for investors to become cautious.

Instead, look for sell signals, such as a climax run or the failure of a late-stage base, that indicate the stock's run is finished.

Oracle (ORCL) is a good example of a stock that began attracting huge media attention after it had already enjoyed a huge run-up.

Oracle cleared an 11.76 buy point (adjusted for a pair of 2-for-1 splits, both in 2000) in a flat base-on-base pattern in the week ended Oct. 29, 1999. Over the next year, it quadrupled to a peak of 46.47 in the week of Sept. 1, 2000, about six months after tech bubble reached its zenith.

The database and business software developer continued to attract media attention as it was peaking. IBD ran stories on the company in March 2000. In June that year, Oracle founder and CEO Larry Ellison was quoted as saying that the company's potential was "breathtaking.

Such hyperbole coming from corporate executives, analysts or pundits is usually a cue for shareholders to take a close look at the stock. In fact, Ellison's comments came not long after the stock hit a peak at 45 in the week ended March 31, 2000. A couple weeks later, it launched into a gut-wrenching 26% plunge through the 10-week line. (1) Though volume was only modestly above average, shareholders could have been forgiven for getting out there, even though the stock later rebounded to a high of 46.47.

Ellison then appeared on the cover of Forbes on Nov. 20, 2000. In the months before then, signs that the stock was breaking down were even more pronounced.

First, the S&P 500 had racked up a lot of distribution days in late August, after the Federal Reserve's rate hikes began to cool the economy.

About a month later, in the week ended Oct. 6, 2000 (2), Oracle plunged 14% in huge volume after breaking down from a late-stage base. It sank decisively below its 10-week line and then sliced through the 40-week line. That was a definite sell signal.

By September 2001, Oracle slid to a low of 10.16 — below the initial buy point. When you sense that the stock has become so popular that it seems almost everybody around you owns it, then there's typically only one way for it to go — down.