Calling All Contrarians: What Signals Do You See? ~ market folly

Tuesday, August 9, 2011

Calling All Contrarians: What Signals Do You See?

Since every site on the internet seems to be spewing venom about how the government sucks, the ratings agencies suck, and the markets suck, we thought we'd head a different direction and start compiling a list of any contrarian signals out there.

First, a disclaimer: this isn't some batshit bottom-calling bonanza post. We don't engage in the X-Games sport of chainsaw juggling. This is merely an exercise similar to the one we penned back on March 8th, 2009 in our post: ranting, raving & contrarian signals that outlined just how crazy things were at the time.

This past Sunday night before markets opened to trade for the first time since the US debt downgrade, some people were exclaiming that it felt like the eve of Lehman Brothers' demise.

On Twitter, we opined that such a claim seemed ridiculous. Maybe the financial crisis made us numb to volatility, but it didn't feel nearly as extreme as 2008; not even close. Lehman was a forced deleveraging while this seems to be an unwind of QE2 excesses.

Comparisons aside, we thought it would be a prudent exercise to rationally process and analyze what we're seeing rather than spit out another article of doom that you've already read ten times. Legendary investor Jim Rogers once said, "I sell euphoria and buy panic." So today we look for signs of panic.

Current Contrarian Signals?

1. The Volatility Index (VIX) has surged from 17.5 in late July to 48 currently. The last time it was this high? Summer 2010 during the market's pullback. Since inception 25 years ago, the volatility index has only been above 44 on 9 different occasions. While it can still undoubtedly go higher (it touched 80 during the financial crisis), there has been a dramatic ramp in volatility.

2. Capitulation? This term is extremely overused. The word 'capitulation' was thrown around 396 times on CNBC last week with their octaboxes of people all talking over each other. On August 4th we tweeted that capitulation usually comes AFTER those calling for it piss themselves and reverse course. You need true panic. One example follows:

3. Hedge Fund Manager Barton Biggs: While this is only one example of 'capitulation', it does give hope to the contrarians out there. Last week $1.4 billion hedge fund Traxis Partners head Barton Biggs called stocks a "strong buy." Only a week later, he himself has capitulated (or made a smart move, depending on your view) by taking "some risk off," saying he hated to be doing so. This is merely one example of people throwing in the towel, but this is the type of behavior seen during true capitulation.

4. Retail Investors Freaking the F Out: You all probably have that one retail investor friend that doesn't pay attention to markets all that often but still wants to make money. You are their "go-to" market guy. When they start calling you wondering what the f*ck is going on, that might be a contrarian signal. When they call you saying they sold everything, that's usually a contrarian signal. Don't know about you, but we received these phone calls yesterday.

5. Bank Charges For Holding Cash: This is somewhat an outlier given it applies to accounts holding $50 million or more, but it's still worth mentioning. Instead of being invested, there is so much cash sitting around in accounts at Bank of New York Mellon that they began charging clients to hold cash in their accounts. One-month Treasury bills traded at a negative yield and indicated that investors were willing to *pay* the government to take their money.

5. ZeroHedge Crashes: The popular market website with a cult-like following crashed on Sunday night due to insane traffic as bears tried to congregate in victory and scared bulls looked for answers.

5. Dow Posts Sixth-Largest Point Loss: The market saw its worst day since the financial crisis as it tumbled 634 points. Stocks have fallen 15% in just over two weeks and such outlier events can be contrarian signals.

6. ??? What other contrarian signals (if any) are you seeing? On the flip side, what bearish confirmations are you seeing? We're looking for both sides of the argument so let us know your thoughts in the comments below.

Again, the disclaimer for those who forgot: bottom-calling is for schoolboy bitches and this post is merely surveying the carnage.

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