How to Be a Contrarian (Buy This)

contrarian

Momentum remains Red as we enter peak fear territory. The Dow Jones took its bottom out for the year, and we continue to take out new lows. While it feels like capitulation may be coming, and the S&P 500 Volatility Index (VIX) is now above 30. This feels like we’re approaching a short-term bottom. Cash remains your best friend in this environment. 

We’re in oversold territory. Full stop. The markets have retested their lows of the year. Biotech and real estate stocks look like they might have some additional losses along the way. However, if we look at the S&P 500 ETF (SPY) and the Russell 2000 ETF (IWM), we are clearly pushing oversold territory. Here’s a way to trade like a contrarian.

The chart below is the SPY – tracking the performance of the S&P 500 over the last year. We’ve had three situations where the Relative Strength Index (RSI) has dropped near that 30 range. This afternoon, the RSI hit 27.44 as we headed into the final 90 minutes of the day.

After we move into those oversold territories… we tend to see some short-term covering in the following days. You can see this behavior in January and June of this year. The same goes for the Russell 2000.

Again, we’re down in an RSI of about 27, meaning we could see a short squeeze any day now. If you’re a contrarian, now is the time to test your resolve. According to Bank of America, investor sentiment is “unquestionably” at the worst level since 2008.

There is a good opportunity to move out two weeks on the Russell 2000 ETF at the $180 strike price for cheap. If a short squeeze comes after this week’s massive downturn, you’ll be one of the few contrarian folks willing to go long. These are the types of small bets that I like to make when the world thinks the world is on fire. Consider the same with the SPY up near the $385 level. 

Recession Worries Accelerate

With the week ending, it’s time to check again on the state of economic growth in the United States. I’m projecting that third-quarter GDP comes in negative. But most banks continue to push the narrative that we will eke out economic gains for the quarter.

Bank of America this month kept its GDP expectation at 0.8% for the quarter. It said that the recent news around housing starts helped “boost the tracking estimate.” Boost? We’re talking about economic growth under 1% for the quarter. Meanwhile, Goldman Sachs projects a growth of 1.2%. This feels a tad high right now. 

Finally, we have the Atlanta Federal Reserve Bank. The GDPNow model projects that economic growth will come in at 0.3% for the quarter. That is a decline of 20 basis points since the September 15 estimate. 

I still anticipate that GDP will come in negative. But I do warn investors that they need to focus more on real final sales and less on the GDP category. One of the easy ways to game GDP numbers is through export figures and inventory build. 

The Energy Game

Oil prices are back under $80 for the first time since January 2022. There are some politicians taking a victory lap over falling energy prices. The reality: The U.S. economy is spiraling toward a recession. In addition, the Federal Reserve’s rate hikes are so aggressive that we are now crushing aggregate demand. If demand were to return to even peak-COVID levels, oil would be much, much higher. 

The surging dollar has also been a major driver of lower oil prices. I continue to argue that investors should look to the long-term as if West Texas Intermediate crude oil were trading at $75 per barrel. That would put Exxon Mobil (XOM) at around $80 or Occidental (OXY) at $50 per barrel. 

However, I’m not buying anything now. It’s very unclear if we are approaching the point of capitulation. 

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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