Yahoo Message Board Post

Here is a Yahoo Message Board post from the SPY board this morning.  This post is very typical of the attitude in the markets:   ***** Subject: Why are futures down this AM Message: only 20 cents but still bizarre   Reply 1: If you knew it was going higher, wouldn't you rather buy 20 cents lower rather than 20 cents higher?   Reply 2: Check again at 10:00...and then 11:00.  This is just getting tooooo easy. *****   That pretty much sums up the attitude in the financial markets these days.  Stocks only go up.  They rarely if ever go down.  If they do drop, just buy the dip because they will go right back up.    Complacency is rampant, and with good reason.  Since September 2010, over six months ago, stocks have only gone up.  The move has been large and nearly vertical.  Shorts have been slaughtered.   A contrarian investor knows that this can not continue forever and that the trend must eventually change.  But markets will always go to greater extremes before reversing.  And who knows just how extreme that will become.

The Pain

Today is not a fun day to be a contrarian investor.  This week has not been a fun week.  These last two weeks have not been fun.  These last two months have not been fun.  These last six months have not been fun.  Since September 2010, it has not been fun to be a contrarian investor.  Do you hear me?   Today is the day that I officially have given up hope for the near term.  The markets have risen yet again, and it seems that just about every risk asset (except, of course, for those assets that I own) had a big up day.  Several leading indicators such as KOL, commodity currencies such as the AUD and BRR, and the Russell 2000 all reached new 52 week highs today.  Several emerging market stocks such as South Korea (EWY) also made new 52 week highs.  The etf of gold mining shares (GDX) vastly outperformed the underlying commodity (GLD) - another positive sign for the bulls.  The only negative sign I can see is that copper was down which may be significant.  Also, the semi conductor stocks underperformed while long dated treasury yields fell.   But all in all, I feel like is March 2009 all over again except that I am short stocks now as opposed to being long two years ago.  The grind has got me down big time.  Every day, day after day, has been a struggle.  I have always had hope and expectations that the market would decline "over the next several weeks".  For the past six months, this has not happened ever and I have been creamed.  My hopes and dreams have been (temporarily) dashed.   This has affected my life in many ways, the majority of which are not good.  I continue to hang in there and hope for better days that might not come for a long time.  I dug my hole, and then I dug it deeper, and then I went deeper and deeper, and then I went deeper still, and here I am today.  It is what it is.  Tomorrow is a new day and will probably be just as frustrating if not more so.  I have come to expect this.    The end of the quarter buying is powerful and it does not appear that it will ever stop.  Stocks only go up.  That is the new normal.  Until, of course, they don't go up and they plunge.  One day that might happen.  I can only hope.

Complacency

For the contrarian investor, the link below is classic.  Here is a poll from last week:   http://carnalstock.com/stock-market-poll/2011/03/poll-is-sp-forming-v-type-bottom-or-w-type-bottom/   Notice that this poll asks which type of a bottom is forming.  Is it a V-bottom where, after having moved down, the market will now move straight up?  Or is it a W-bottom where the market will make one more down move before moving straight up?   Notice that both conditions presume that the market will move straight up.  There is no mention of the possibility that the market may move down.  This is text book complacency and it is very prevalent.  The bulls are back and everyone is asking how much higher the market will be going.  This past week showed the biggest loss of the VXX in percentage terms ever.  Everyone is looking up, very few are looking down.  The amateur masses are looking up.  Contrarian investors, like the smart money (i.e. top corporate insiders), are looking down.

China Property Video

I came across this very interesting video today about China's ghost towns:   http://www.sbs.com.au/dateline/story/watch/id/601007/n/China-s-Ghost-Cities   The China real estate market is one big bubble.  All bubble's end bad and this will be no exception.  In order to achieve their high growth rates, the Chinese continue to build housing everywhere and anywhere.  The huge cities they are building are nearly empty (which is very eerie) and the housing is priced out of reach of the majority of the population.  Per the video, it is common for many working people to share very small spaces together, while there are 64 million empty apartments in China!  The social aspects are tragic, in my opinion, and they are going to get much worse.  The owners of these speculative properties are going to be left holding the bag when the pyramid collapses.  This will create massive social unrest and possibly revolution.  This property bubble can not go on forever.   Contrarian investors will see the potential for negative Chinese GDP growth in the not too distant future.  The implications of this will be severly negative for the world of risk assets including stocks, corporate bonds, commodities and even race horses and artwork.

Still No End in Sight...

Today was another miserable day to be a contrarian.  Global assets rallied strongly, except for the US dollar and treasuries of course.  It is quite difficult to be a contrarian investor and to constantly lose money as the topping process continues.  In the end, I will triumph.  But the end is not in sight.  At least, I can not see it from where I am sitting.  The amateurs own the market right now.  They have owned the market for the past 6+ months, and nothing is different today.  However, everything has a beginning and an end.  All manias have an end.  The internet stock bubble ended in March 2000.  The US housing bubble ended in 2006.  The tulip bubble ended in Holland in the 1600's.  This strong surge for global risk assets will end too.  Goldilocks is always followed by the three bears.  The S&P 500 closed the day near 1310.

Fake Left, Go Right

Days like this are tough and they make me want to rethink my strategy.  It is not easy to be a contrarian investor.  The S&P 500 is hovering around 1300 and emotionally it feels like this will never change.  Rationally, however, I know better.   The primary function of the markets are to ensure that the majority of participants (i.e. amateur investors) lose money.  Therefore, before the markets make a major move down, they will first make a major move up.  That way, the majority of people will be fooled into covering their shorts and going long stocks.  I believe that we are nearing the end of a massive head fake up.  This is similar to basketball.  If a player wants to go to this right, he will first fake to the left in order to get his opponent off balance.  He is then free to go to the right which is the direction he intended all along.   Sometimes it feels like the market will never drop, but my rational mind knows better.

The Bell is Ringing at the Top

I was about to shut off my computer earlier today, when I came across this gem of a news article:    http://www.msnbc.msn.com/id/42199180/ns/business-your_retirement/   As a contrarian investor, I am very happy to see this type of article featured in the media.  We have had the biggest bull market surge since the Great Depression, and this is the kind of article that one would expect to find at or near a market top, preceding a trend change.  It is just dripping with complacency and optimism, and there is not a hint that the general direction of stocks could possibly be down.  They do not ring a bell at the top, but this is pretty close.   Consider that in 2007, when the market was at an important peak, the media was full of articles about the "goldilocks" economy.  Of course, instead of goldilocks, we got the three bears.  In late 2008/early 2009, as the market was plummeting, the media was full of articles about people cutting back on their consumption and about "recessionistas".  I even remember one article urging new parents to use cloth diapers on their babies in order to save money.  Of course, we instead got the biggest bull market since the Great Depression.  Today, we have an article telling people that they "have to participate" in this market and that the constant switching of cabins on the Titanic instead of leaving the ship is "clearly is a winning strategy".   A contrarian investor knows that it is not different this time.

US Dollar Weakness? A Contrarian View..

The main theme of the markets for the past four months has been a transformation from a bull market to a severe bear market.  Starting with the QE2 announcement by the Fed in November 2010, several emerging markets (China, India, Colombia, etc.) made their peaks and have since been forming a very bearish sequence of lower highs.  Nearly all risk assets have since joined them in establishing downtrends, with the most lagging assets such as the S&P 500 having set new highs into February.  This past Friday, the US Dollar index set a new low around 75.5.  This weakness is misleading as the majority of this move is due to strength in the euro.  The currencies of commodity countries such as Australia, Brazil and Canada, which are much more important in forecasting the future direction of the market, have been forming a very bearish pattern of lower highs.  I expect this pattern to soon accelerate downward and result in lower prices for these currencies and strength in the US dollar.  The behavior of commodity country currencies is a leading indicator in the financial markets, and these bearish patterns have severly negative implications for risk assets worldwide.    I expect the markets to be very weak in the short & intermediate term.  However, it must be noted that periodic sharp upward bounces are most common in severe bear markets.  This type of contrarian behavior helps the market to ensure that the maximum number of amateur participants will always lose money.

BOJ Intervention

Stocks were up today, with the S&P 500 closing at 1,273.72 (+1.34%).  The primary trend in the markets is DOWN, but a contrarian perspective tells us there will be frequent sharp recoveries after all dips.  This servers the purpose of confusing amateur investors into buying stocks when they should be selling or selling short.  The next two years should feature a pattern of lower highs followed by lower lows.  This pattern will be a grind for all market participants (except top corporate insiders).   The real interesting news happened after hours where the Bank of Japan made a massive intervention in the forex market.  Earlier in the day, the yen had slumped to an all time low against the dollar, below 79, and this intervention sent the yen flying 3% to back over 81.  It is trading at 81.1150 as I write this.  It will be interesting to see how long an effect this intervention has on the yen.  If history is any guide, the effect will be temporary at best and then the trend will reassert itself.  The forex market is so huge that it is impossible for a single entity, even a government, to manipulate it.  The Asian markets and all risk asset futures are green right now, but it will be interesting to see how things look tomorrow morning.

Watch the VIX

The world is on edge as the Japanese nuclear crisis continues to escalate.  As a contrarian investor, the best insight into the level of fear in the markets is measured by the VIX.  In simple terms, the VIX measures the premium of put options on the S&P 500.  If the VIX is low, it means that the fear premium is low, and vice versa.  A rising VIX correlates well with lower stock prices.  Today, the VIX shot up 20.89% to close at 29.40.  It is up more than 50% in the last week.  This is a huge move and reflects the fear and uncertainty that currently persist.  The S&P 500 closed the day at 1256.88, down 1.95%.   I am monitoring this situation closely.  I am extremely bearish on almost all risk assets through the intermediate term (2+ years), but I know that the most severe bear markets are always accompanied by the most powerful short term rebounds.  This has the effect of knocking out the late comers and forcing them to cover their short positions just before the next big move down.  I am happy holding my short positions now, but as a contrarian investor, I may have to reconsider if the VIX continues to rise to the 40 level and above.

Bullish on the US Dollar

The big news in the world continues to be the disaster in Japan.  The stock market opened the day down big, but it later recovered about half its losses.  The S&P 500 lost 1.12% on the day to close at 1281.87.  From a contrarian investors point of view, the bad news in Japan is supportive of the market.  News such as this causes amateur investors to sell stocks and to sell short, and the market will always do what is necessary to cause the maximum number of people to lose money.  This could explain the intraday recovery that we experienced today.  I expect the markets to continue to be choppy and to frustrate everyone, both bulls and bears alike.  The dominant trend is down, but the market will not move in a straight line.  Lower highs will be followed by lower lows.  Amateurs will continue to "buy the dip" and will be punished accordingly.  Momentum traders and chartists will pile onto the short side near all important lows, and they will suffer accordingly as well.    Contrarian trading argues for a disciplined approach to carefully establishing positions and avoiding what the majority of market participants are doing at any one time.  An overcrowded trade can never be successful.  Currently, the crowd hates the US dollar and loves gold & silver.  A recent Market Vane survey showed that only 7% of the people were bullish on the US dollar.  Look for the US dollar to outperform both gold and silver over the next one and a half to two years.

Japan

There has been very difficult news out of Japan these last few days.  A powerful earthquake, a tsunami, and now a nuclear meltdown have torn this country apart.  This is an almost unimaginable crisis, and my thoughts and prayers are with the thousands of people who are hurting.  One of the worlds largest economies has been devastated overnight, and I am sure there will be many repercussions to come (most of which will not be good).  But the real crisis right now is with the people.  I pray that aid will arrive and that the people will find peace and comfort in their lives.

Insider Trading Activity

One of the most important concepts of contrarian investing is that you must invest like a corporate insider, and not like an amateur.  Top corporate insiders reflect the well informed minority of investors (i.e. the "smart money"), while the masses reflect the exact opposite.  Top corporate insiders sell progressively in advance of major peaks and buy progressively in advance of major bottoms.  The masses buy and sell in lump sums based on things like a tip from one's uncle or because a certain security is going up or because it was recommended by someone popular like Jim Cramer.  Top corporate insiders are not day traders - they buy or sell only when there is a compelling reason to take action.  They understand their industry the best, and they do not get emotional in their trading.  Top corporate insiders buy and sell for all the right reasons, while the masses buy and sell for all the wrong reasons.  There are many reasons why top corporate insiders will always trump amateur investors, and I will attempt to discuss those reasons in more detail in future posts. We have currently had an extremely extended rally in such well known indices as the S&P 500 and the Russell 2000.  This huge rally since September 2010 has featured a huge amount of selling by top corporate insiders relative to buying, concentrated at the important peaks.  While the masses believe that there is no longer any risk in the market because "stocks only go up" or "the Fed has my back", top corporate insiders have been selling the stock of their companies at their most aggressive pace ever.  This behavior by top corporate insiders tells us everything that we need to know about the future market direction.  The next major intermediate term move in the markets which will be DOWN with a capital "D". A daily summary of corporate insider trading activity can be obtained here: http:\\j3sg.com

First Post

This is the first post on the Contrarian Investor blog.  I have started this blog today to document my journey and use of contrarian investment tactics to achieve my financial goals.  The basic idea of contrarian investing is that the popular expectations of the majority of people in this world will almost always be proved wrong.  Hence, investing against the popular viewpoint will be very rewarding in time.

As of today, the S&P 500 is at 1304.28, and the Dow Jones Industrial Average is at 12,044.40.  The media and the masses are sure that the market will continue to rise this year and beyond.  After all, the market only has one direction and that is up!  Inflation is here today, and hyper inflation is coming tomorrow.  QE2 is here today, and that will be followed by QE3 & QE4 & .... & QE Infinity, etc.  The market has been on a roll since September 2010, and this has been the most intense two year bull market since the Great Depression.  Jim Cramer has recently proclaimed that "the sky is the limit" for this market.  Everyone I work with is long the market, and the bears have been silenced.

However, there are major storm clouds on the horizon.  Emerging markets peaked in November 2010, and the S&P 500 may have peaked on February 18, 2011 at 1344.07.  Most global risk assets appear to have begun major downtrends.  The majority of the world's population lives in a housing bubble, and history has proven that these do not end well.  I believe that the next 1.5 to 2 years will feature the largest deflationary stock market crash since the Great Depression.

I have been short stocks since September 2010, and I have been getting creamed.  But every dog will have his day.  I believe that my day is coming soon.  I am currently short the QQQQ, EEM, and SPY.  In addition, I own long dated SPY puts.