Value Investing

2016 and The Limitations of Contrarianism

2016 and The Limitations of Contrarianism by LST

I find writing immensely therapeutic. and after the last two weeks of banging my head against the wall on a daily basis, I really could use some therapy. Writing may even help me recover from the brain-damage resulting from all this head-banging.

I’ve always had the (un)natural tendency to do or think the opposite of what others think or do. I’ve tended to be contrarian before I even knew the word existed.

What I learned over the years, regarding contrarianism for the purpose of investment/trading:

  • It often leads to losing $ (i.e. “permanent capital impairment”). See oil equity longs circa 12 months ago, and ever since.
  • It tends to be a necessary (but insufficient) characteristic for my best trades (ever)
  • measurement of contrarianism/crowding can be highly valuable…or garbage-in, garbage-out.
  • It is a lonely place to be. Not where you go to make friends.

So I would like to point out a few facts, for my own and posterity’s edification:

  • Many members of The Street/Sellside have been fairly bearish since the end of last year/beginning of this year.
  • Sentiment measures/indicators have been negative.
  • Some measures of positioning have been fairly bearish.
  • Gartman has been as right as he’s been wrong.
  • Harry Dent is looking like a genius.
  • CNBC “markets in turmoil”
  • “2008” and “crash” have been mentioned far more frequently than normal

All the above preceded – yes, preceded – further declines in US equities. If one possessed a Niederhofferian faith in the validity of such signals and contra-signals, and followed the natural course of reasoning and therefore bet in the other direction, one would be down more than -10% YTD. The path to blowing up.

Complicating matters further:

On one hand,

  • a certain levered long operator (posing as a hedge fund) who seems to have a penchant for blaming quants/HFTs/the boogeyman anytime his fund is down, goes on TV to tell the world he is.. <drumroll> bullish
  • Whitney Tilson, a fan favorite, expressing bullishness.

On the other hand,

  • AAII Sentiment
  • other sentiment indicators, e.g. put/call, etc.
  • Markets in Turmoil
  • Mainstream nightly news
  • “2008” and “crash” continue being mentioned far more frequently than normal

Some food for thought:

  • A certain macro hf mgr earned enough (unclear if realized or not) just in the last 1-2 weeks, to wipe out his entire 2015 double digit losses. Another hf mgr (one of the best performing last year), is up half of what they were up in 2015….in the first 2 weeks of 2016.
  • Some funds (the ones that were down -20% or more) probably stand at a knife’s edge… I think it will be difficult for them if market correction this year goes beyond 10-20%. Beyond down 30-40% is very difficult to recover from. -40-50% is (arguably) escape velocity.
  • 2 weeks of 2016 feel like 4-6ish months of most years. I believe my ‘feeling’ squares with statistics. it is with merit.
  • There’s only one person I know (personally) who got the recent price movement(s) right for the reasons… he’s the only one who alerted to look toward China back in November/Draghi, while all eyes were on Draghi/Yellen… even better, he ex ante explained the mechanism by which x –> y –> z… what’s amazing is even after these moves, I’ve seen NO ONE explain the mechanisms!
  • I need to (resume) reading more 10Ks.
  • I mentioned the word ‘bifurcation’ weeks before the new year.  I see more people (via different analytical methods) coming to same conclusions now. Unfortunately, I don’t think there’s been any resolution yet. The only thing that has changed is that risk assets are currently priced lower.
  • There’s one area in markets (I think only?) where I see price momentum…and signs of parabolic rise. I love parabolas.

Long-Term Contrarian Profits