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The Matt Drudge market indicator

July 8, 2011: 11:09 AM ET

The Drudge Report rarely links to financial headlines. A new study shows that when it does, it's time to adjust your portfolio.

FORTUNE -- Matt Drudge has been called many things but, unless I am mistaken, a stock market seer is not one of them. On Wednesday, someone did just that. Or, to be more specific, someone suggested that the Drudge Report is a contrary indicator. Same difference, really.

Matt Drudge

Matt Drudge, market seer?

Drudge made his name covering Monica and the blue dress, and continues to be a player in the political conversation. Anybody familiar with his site knows there's one big link at the top of it, and when he links, traffic follows. The enduring nature of his influence is awe-inspiring.

And that's all he does, if you can believe it. The man has made a fortune, and continues to do so, one link at a time. He is the envy of all bloggers. In 2007, I tried to put a value on his operation, but in retrospect—we concluded $10 million to $20 million at the time—it seems absurdly low. Sorry for underestimating you, Matt.

What Drudge does not do with any regularity is post finance-related links. And here's why that gets interesting. Paul Hickey and Justin Walters, the ridiculously prolific quantitative researchers behind Bespoke Investment Group, published a piece of research on Wednesday called The Drudge Headline Indicator. The gist of it is this: you might be able to use Drudge in your investment strategy.

According to the Bespoke report: With 30 million daily views, Drudge is arguably the most widely followed news source on the web. Conventional wisdom says (and it is largely correct on this matter) that once financial news stories go mainstream, and pessimism or optimism (it doesn't matter which) seems to have gone all the way down to the last man, then you would best serve yourself by looking in the other direction. With his audience—which is bipartisan, despite his own right-leaning inclinations—Drudge is as mainstream as you can get. (That is, until Facebook gets into the news game. Which you know it will at some point. Mark Zuckerberg will soon own everything.)

As Paul Hickey of Bespoke puts it, once a financial-page headline has moved into front-page status for a sustained period of time, "it's probably getting close to an inflection point, whether it's a bottom or a top." And here's the thing with Drudge: he isn't a happy, smiley kind of headline writer. So when he does finance, it's usually some sort of horror story. Some recent examples: Economic Horror as Data Plunges (6/2/11), $6 Gas by Summer? (4/20/11).

To the statistics, then. Bespoke compiled 50-day rolling periods of finance-related headlines on Drudge since mid-2003. The day of maximum concentration—that is, the day with the most days out of the previous 50 with a finance headline—was February 27, 2009, with 21. The bear market low happened less than two weeks later, on March 9th.

Hickey also points out that there was a day with exactly zero finance headlines over the trailing 50 days in the summer of 2008, just before the it all hit the fan with Lehman Brothers. No one saw it coming, and so come it did. Drudge's mood, in other words, is something to bet against.

In recent weeks, finance-related headlines on Drudge have reached their highest levels since the depths of the financial crisis. And for good reason: we have Greece, U.S. unemployment, that whole debt-ceiling thing, and more. Bad news, right? According to Hickey, maybe not. "Ten years ago, a 1% drop in the market was a great time to buy," he says. "Now, it's, 'Ah, shoot, I should have sold yesterday.' A too-confident consumer is a long way off, and that's likely a bullish sign."

I personally have a hard time staring possible Greek debt contagion or persistent mass unemployment in the U.S. in the face and calling it a buying opportunity. Maybe that's why I'm just a lowly journalist and not a portfolio manager. But according to Bespoke, even my opinion may not be not a bearish sign, but its opposite.

Drudge told his readers on June 1 of this year that, We Are on the Verge of a Great Great Depression. "You don't tend to see that at the top of a market," says Hickey. To invert a common phrase, then: Sellers beware. If Drudge is to be believed, we're in store for one hell of a rally.

(Thanks to Brad Lipsig at UBS for pointing this study out to me in the first place.)

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About This Author
Duff McDonald
Duff McDonald
Contributing Editor, Fortune

Duff McDonald is a contributing editor at Fortune. He has also written for New York, Vanity Fair, Condé Nast Portfolio, GQ, WIRED, Time, Newsweek, and others. In 2004, he was the recipient of two Canadian National Magazine Awards -- best business story (gold) and best investigative reporting (silver) -- for "Conrad's Fall" in National Post Business. Last Man Standing, his biography of Jamie Dimon, chairman and CEO of JPMorgan Chase, was published by Simon & Schuster in October 2009. He is also the co-author, with Owen Burke, of The CEO, a satire.

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