Stock Exchange: Three Contrarian Ideas

Every trader wants to be a contrarian. You get to be the “smart money.” You buy low and sell high. Buy the dips and sell the rips. Contrarians may not always be right, but they certainly get attention.

Brett Steenbarger, everyone’s favorite expert on trading, did a study of this in 2006. He compared two hypothetical traders. One bought the market after a down day; the other bought after an up day. Remarkably, since the market usually goes up, the former trader did better. A lot better. It would be interesting to see an update on this study.

Dr. Brett, whose website is a treasure trove of ideas for trading ideas, discusses how this applies to emotions and trading:

It occurred to me after writing the post that, when I’ve developed quant models of market behavior than anticipated a move, I’ve often heard kudos from others about my “good call.”  When I’m a psychologist and listening to my clients, helping them make changes in their lives by accessing strengths they didn’t realize they had, no one compliments me on good calls.

Our Stock Exchange gang does what Brett recommends–not prediction, but getting in tune with the market opportunities and avoiding emotion.

The fact that two members of the group do not have fresh ideas this week sends a message – one that I will discuss further in today’s conclusion.

Review

Our last Stock Exchange considered how to find trades in a low-volatility market. That topic worked like magic! Volatility picked up dramatically in the ensuing week. Maybe it was the power of guest expert Chuck Carnevale. Special thanks to him for his astute comments and good nature in joining in our conversation. If you missed it, please check back.

Market Tech Take

I hope to do something along the lines of a weekly review of important technical indicators. Our own key indicator, the Market Health Index (MHI), remains positive. Watch this space! Suggestions about your own favorite indicators are most welcome. If you have something good, we will run it on our special universe. You will get a result that you cannot see elsewhere.

Let’s turn to this week’s ideas.

This Week—Finding Contrarian Ideas

RoadRunner

(Commentary translated from various pecks, rapid movements and beeps).

Targa Resources (TRGP) was on a real tear between the start of November and the end of January. Beyond this three-month streak, the price has mostly leveled off. I take that as an opportunity.

Based on the shape of these moving averages and the trends over this past year, this could be a promising holding. My general approach is to hold positions for about 20 business days. We’ve got a relatively slim shot at a pop here, but I’m still willing to make this one of my short-term holdings.


J: As you can easily see from the F.A.S.T. Graph chart, this is a very poor buy for investors – at least on an earnings basis. The current price might not be justified for years.

RR: The market sees something else, as the recent price action shows.

J: Your method is to look for rising channels, buying at the bottom?

RR: Yes.

J: The price seems to have violated the bottom of the channel.

RR: Not quite. It is at a key point. It would help if you started drawing the channels.

J: I am the boss!

RR: Then assign someone with fingers. I have done my part. Time for my lizards – and thanks for the diet upgrade!

Holmes

This week I’m buying Brixmor Property Group (BRX) an owner operator of grocery-anchored community shopping centers in the U.S.

Here’s a stock that has been bouncing between 23.5 and 25 until Feb 27th when it tumbled down to 20.80. It has bounced a little since then trading in a tight range 22 and 20.90. I’m looking for rebound to 23.50 level with a tight stop at the 20.75. Hopefully that February move down has resulted in a wash out of sellers and now the stock is in stronger hands.

J: This is a typical chart pattern for you. Sometimes you wait for more of a rebound.

H: It has worked well in thousands of test cases over many years. You just need care in spotting it.

J: Shopping centers have not been doing well. Amazon (AMZN) is beating them on price and service. People would rather order from home.

H: Is that also true of grocery-centered properties?

J: I don’t know. Amazon is doing some groceries as well.

H: That sounds like a long-term effect. I will be out of this stock before that happens.

Oscar

I might have said this before, but here’s a holding that looks like a home run. The 50-day moving average on the Consumer Cyclicals ETF (XLY) is heading way past the outfield and into the cheap seats.


 

As you likely know, my M.O. is to find a momentum pick for a short term holding. There are enough attractive stocks within this area of the market that I’m not concerned about an imminent dip. I’ll keep an eye on this one for 4-6 weeks, and try to let it go for a small gain.

 

J: Good luck with that. All of the current news warns about retail and consumers. The word is out: The “Trump Trade” is off.

O: Trump? Who is he? Who is trading for him? Are you talking about the guy who was scouted by the Phillies? He is too old to be a player.

J: You need to read more than the sports section and Baseball Reference. This Trump is the current President.

O: Oh. Yes. That one. I thought that consumer sentiment was strong.

J: It is, but that is the key question for these cyclical stocks. What about the reader questions?

O: Like Felix, I am emphasizing the top choices from readers.

J: So they are not necessarily your own favorites?

O: No, but there is plenty of overlap.

J: How did you do in March Madness?

H: Not well. I don’t take the chalk – no edge. Time for baseball and fantasy golf.

Felix

I don’t have a new pick this week, so I’d like to look back to one of my recent choices. Continental Resources (CLR) was at a nice price point when I recommended it in early March. Over the course of the month, it continued to decline past February’s trading range.


This is part of the reason why I like to hold positions a bit longer than my friends. Some might be tempted to stop out this position at the $43 mark. I’ve kept this in my portfolio, and it’s currently a small gainer. My goals are to hold out until the stock starts trading near its levels from the beginning of the year, above $50.

J: To be clear, you have a system of limiting losses – something like a stop?

H: Yes, but it has a wider range than the traders.

J: What about questions from your fans.

F: I always appreciate reader questions. The extra work helps my pay.

J: Are you responding to every request?

F: I am making a list of top choices from the “reader universe.”

J: What if a reader request is not on the list?

F: Then I do not see it as an attractive long-term choice. I respond to email with more specific questions.

J: And where would that be?

F: ETF at NewArc dot com. At least until you give me my own personal email address!

 

 

 

 

 

 

 

 

 

 

 

 

 

J: Where is Athena?

F: Chuck Carnevale told her that if you could take a long weekend, she could also.

J: Chuck wouldn’t say that!

F: That’s what she told me to say. She has nothing new this week.

 

Conclusion

Sometimes you learn from what is not happening. Just as Sherlock Holmes (no relation to our own Holmes, despite his attire) noted when the dog did not bark in the night, the absence of expected action had meaning. The flat market, followed by the recent pullback, is not an environment for momentum driven strategies. The result is a lack of action from our momentum strategies. This fact encouraged me to adopt our theme for the week – Contrarian Trading.

As we have frequently seen in this series, there is a time for each method. The market is offering some rebound trades, while momentum is out of favor. Respect what the market is giving you.

 

Stock Exchange Character Guide

Character

Universe

Style

Average Holding Period

Exit Method

Risk Control

Felix

NewArc Stocks

Momentum

66 weeks

Price target

Macro and stops

Oscar

“Empirical” Sectors

Momentum

Six weeks

Rotation

Stops

Athena

NewArc Stocks

Momentum

One month

Price target

Stops

Holmes

NewArc Stocks

Dip-buying Mean reversion

Six weeks

Price target

Macro and stops

RoadRunner

NewArc Stocks

Stocks at bottom of rising range

Four weeks

Time

Time

Jeff

Everything

Value

One month or long term

Risk signals

Recession risk, financial stress, Macro

 

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Questions

If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments. Address them to a specific expert if you wish. Each has a specialty. Who is your favorite? (You can choose me, although my feelings will not be hurt very much if you prefer one of the models).

Getting Updates

We have a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. We report regularly on the “favorite fifteen” in each category– stocks and sectors—as determined by readers. Sign up with email to “etf at newarc dot com”. Suggestions and comments are welcome. In the tables above, green is a “buy,” yellow a “hold,” and red a “sell.” Each category represents about 1/3 of the underlying universe. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

1 thought on “Stock Exchange: Three Contrarian Ideas”

  1. You (and the menangerie) are always such a pleasure to read sir! Thank you for all that you do for us!

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