Contrarian Trading

A large number of TV, radio and print gurus are infamous for taking an emotional stance on markets. At any one moment they scream that the market (or sector, stock, commodity) is “flying high”. Often, within days they morosely report that the market “has no bottom”. The print media is notorious for recognizing an intermediate trend just as the trend is about to peak. Brokerage reps are notorious for their bullish sentiment on markets. The industry’s frequency of Buy recommendations substantially exceeds their frequency of Sell recommendations.

Of note to me is when analysts and the media take extreme views. In July of 2006 we all recall when analysts were screaming to get on board because the then $US75 barrel crude oil would rocket to US$100 within a year. And 6 months later in January 2007 when the price of crude oil briefly touched below $50 U.S. per barrel these same analysts were predicting $40 U.S. per barrel. And of course the price had bottomed out and began trading higher

These analyst predictions can cause investors and traders to jump in at the end of a run-up, or panic and get shaken out of a selloff. More often than not, when the “experts” are bullish on the market, sector or stock, most of the buying has been completed and downside risk is significant. Conversely, when most investors and traders are told to be bearish on the market, sector or stock, chances are that most of the selling has been completed and upside potential is significant.

I have previously written that “Fear and Greed” drives the markets and that is exactly what often fuels the “herd” or “sheep” effect. Remind yourself to step back from markets that technically are overbought or oversold. Regroup, check the charts and prepare a strategy to take advantage of these huge swings. Many profits can be made by being a lone wolf while all the sheep are being slaughtered.