Fortunes have been by investors who spotted when a bull or bear market had run its course and, contrary to current market sentiment, either sold or bought just before the turnaround. Warren Buffett said he was getting out of the market during the dot com boom because the market made no sense. He, and many others, came back into the market to pick up good stocks at bargain prices after the dot com crash. The same story has played out with every major crash including the Covid Crash and recovery when we at Top Gun Options assumed positions contrary to popular market sentiment. What is contrarian trading? When can you use it and can you make money with this approach?
Always Being a Contrarian Does Not Work
There are so-called experts who made their name by calling a market turnaround. These folks unfortunately fall into the trap of always expecting a market crash around every corner. One such “expert” was said to have predicted twenty of the last two stock market crashes! In other words, folks who followed their advice lost money 90% of the time. This blind approach is a bad over the long term as the guy who gave pizza reviews and stock picking advice and told his followers that “stocks always go up.”
When Does Being a Contrarian Work?
Going back to the “Oracle of Omaha,” Buffett advised investors to be fearful when the market is greedy and greedy when the market is fearful. He also has advised folks never to buy a stock unless they fully understand how the company makes money and how they will continue to make money into the future. Here at Top Gun Options we went long volatility, bought puts, went into cash, and went against a rising market in the first phase of the Covid Pandemic. What happened was that we recognized why the market was still heading up as a lethal plague began to sweep the world. The US Federal Reserve and the People’s Bank of China were both propping up the markets. Meanwhile, Trump as well as the Chinese were lying about how bad the situation was and many people bought into the falsehood that Covid was “just another flu.”
Accurate Prediction of the Futures Makes a Successful Contrarian Trader
We projected the pandemic ahead a bit, anticipated the lockdowns, and how the global economy would tank. Thus, we sold into every dip instead of buying and profited each time while the “smart money” kept losing. During 2020 we profited a second time, making millionaires out of little old ladies in tennis shoes. That was when the Fed stepped in the poured trillions of dollars into the economy. The old saying is that you cannot fight the Fed and it was true in 2020 when the “smart money” finally said that you should sell your stocks after many had lost most of their portfolios. When the Fed opened the flood gates by adding to its balance sheet, dropping interest rates to near zero, and even buying stocks the market went up and kept going up. In each case we adopted a contrarian position to the market at the turnaround and virtually printed money. Only later did the “smart money” come along.
Being a Contrarian Requires Both Fundamental and Technical Analysis Skills
The technical side of trading is what generates short term profits as the market jumps up and down. It also helps to pick a major turning point. But what helped the most in the Covid crash and recovery and in similar market situations is staying current with what is going on in the world as well as the USA. At Top Gun Options we use the DRINC acronym to help us keep an eye on the Democrats and their spending as well as the Russians, Iranians, North Koreans, and Chinese and their actions which are capable of sending the market into a tailspin.