Many active traders will describe themselves as trend followers or "contrarians". While it sounds oxymoronic to me, I suspect there are a few who would describe themselves as "contrarian trend followers". After two decades of trading stocks, options, and futures I tend to be contrarian. I try to not fight the tape, but I tend to like out-of-favor situations and am skeptical of any market which has seen a large run-up.
At this date with the Dow and other US indices making new highs on an almost daily basis I am getting skeptical of this market. I think the trend is still up, but I think we are also in a trading range. Reasonably nimble traders should be able to make money from either side of the market. But these sharp up moves in reaction to sell-offs makes me think this market is struggling to find sellers. In other words the professionals must be enticed to sell or go short with sharply higher prices. This is the type of action which should be indicating a possible top -- if the only people who are willing to sell are the professionals (and they tend to be right more often than not), then I would be wary of going aggressively long.
Even the "value" indicators such as price-earnings ratios and dividend yields are at levels which suggest the market is "pricey". But markets go to extremes, and in retrospect it is much easier to see them. One way we could work off this extreme situation is to have the Dow "back-and-fill" for several years -- trade between 7000 and 9000 until the millennium. Earnings and dividends would have a chance to catch up.
The point of this page is to suggest some possible contrarian portfolios.
One is to pick an out-of-favor industry. One is the so-called tobacco industry. I say "so-called" because many of these producers of cigarettes and other tobacco products have diversified into many other product lines, but when news about cancer, smoking, and class-action lawsuits makes the news the public seems to react as if these are one-product companies. I started following this portfolio last year; because of repeated cancer and other health-related scares over the years this type of portfolio can move into and out of favor.
Another is to pick stocks which are out-of-favor because of the calendar -- that is, stocks which are making new yearly lows in late November to mid-December. These stocks tend to be especially hard hit because of tax-loss selling.As a group they also have a tendency to rebound nicely in the 30 to 60 days following.
Still another is to take some sort of ranking system and pick those which are most undervalued. One strategy is to take the ten stocks which are trading at the deepest discount to book value.
Here, then, are some possible portfolios which have worked with varying degrees of success in the past -- your mileage may vary:
| Stock | Symbol | Price 8/23/96 |
Price 7/24/97 |
Net change* |
|---|---|---|---|---|
| American Brands | AMB | 41.625 | 54.00 | +25.1% |
| BAT | BT | 13.25 | 18.188 | +32.5% |
| Culbro | CBO | 53.75 | 107.625 | +94.2% |
| Imasco | IMS.TO | 26.80 | 41.80 | +50.9% |
| Philip Morris | MO | 29.33 | 43.9375 | +44.8% |
| RJR Nabisco | RN | 25.50 | 31.4375 | +18.8% |
| UST | UST | 30.625 | 28.3125 | -11.4% |
| Universal Corp | UVV | 24.625 | 34.00 | +33.3% |
| Fortune Brands | FO | ?? | ?? | +??% |
| Dow-Jones Industrials | DJIA | 5700 | 8100 | +42.1% |
Notes:
| Stock | Symbol | Price 12/95 |
BV/share | Pr/BV | Pr 6/28/96 |
Return |
|---|---|---|---|---|---|---|
| Dixie Yarns | DXYN | 4.00 | 14.10 | .284 | 4.875 | 17.438% |
| Venture Stores | VEN | 3.625 | 12.60 | 0.288 | 6.50 | 73.724% |
| Baker (J.) | JBAK | 6.125 | 16.25 | 0.377 | 7.50 | 18.000% |
| Hechinger Co. 'A' | HECHA | 4.25 | 11.30 | 0.376 | 4.375 | 1.118% |
| Perini Corp | PCR | 8.625 | 22.90 | 0.377 | 12.00 | 34.348% |
| Aviall Inc. | AVL | 8.00 | 17.00 | 0.471 | 9.25 | 11.313% |
| Laclede Steel | LCLD | 7.25 | 14.80 | 0.490 | 6.3125 | 16.672% |
| NS Group | NSS | 2.75 | 5.70 | 0.482 | 3.00 | 4.909% |
| Grossman's Inc. | GROS | 1.5 | 3.00 | 0.500 | 1.625 | 4.167% |
| Charming Shoppes | CHRS | 2.625 | 4.95 | 0.530 | 7.0625 | 161.667% |
| Dow-Jones Industrials | DJIA | 5041.61** | 5740 | +13.85% | ||
Notes:
"Year End Pop '97" Portfolio
Thisportfolio we will develop in late November and early December. We will probably try to pick a different stock each day for ten days from the list of NYSE 52-week lows.
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Date created: July 24, 1997 Last modified: December 5, 1997 Copyright © 1997, Greg Cramer, O.M.S. Maintained by: Greg Cramer optionsms@earthlink.net