This Week: Is It Time To Be Contrarian?

So far, volatility has ticked up this week, and the stocks that had been performing best all year (e.g. momentum, technology, growth, FANG) are underperforming this week, thereby leaving some investors wondering if it’s time to get contrarian.

Considering momentum and FANG-type stocks have been performing so well since last November’s election, and considering a new pundit comes out every day claiming the market is overvalued, and considering we’ve entered the final month of the year where talk of profit-taking and rebalancing is increasingly discussed, and considering some value stocks are arguably getting to “too cheap,” many investors are wondering: Is it finally time to be contrarian?

Regarding contrarian ideas, Eric Parnell offers some interesting perspective in this article: Anti-Amazon: A Favorite Investment Theme For 2018. Eric explains “the upside investment opportunity that I see for the coming year is not trading against Amazon, but instead taking the opposite side of the Amazon trade.” As an opportunistic value investor, Eric focuses some of his time and attention on areas of market inefficiencies created by the Amazon narrative.

Our Trading Models:

Our trading models (highlighted in the table below) use a combination of momentum (non-contrarian) and “dip-buying” (contrarian) strategies, and unlike long-term investing, our models have the luxury of using “risk controls” to exit trades that are moving against us, instead of buying something “cheap” and then watching it get much cheaper over the following months and years as many “value-trapped” long-term investors often struggle to avoid.

Aside from the risk controls (e.g. stops and macro factors) that help us avoid long-term value traps, our models also have the luxury of using complementary momentum and “dip-buying” strategies thereby minimizing the risks of being trapped in one style when the other is out performing for an extended period of time (i.e. growth and momentum have been beating the pants off value and dividend investments so far this year, as shown in the following table).

Trading Model Performance:

Per reader feedback, we’ve recently started including a table summarizing the performance results for our trading models. The table (below) shows actual client results after commissions and fees (I watch this every day, and now readers can see it as well). We’ll share additional information, including test data, with those interested in investing. For our weekly updates, we use only real-time results.

And not surprisingly, our momentum models (e.g. Felix and Athena) have been doing very well in recent months, while our contrarian “dip-buying” strategies (i.e. Holmes, and somewhat Road Runner) have been somewhat lagging. However, very importantly, our “Blended” approach has been performing well, outperforming the market as measured by the S&P 500 (SPY).