Contra-contrarian ?

Several emailers asked the following related questions:

"How can we have a sell off in September if everyone is expecting it?"

Another variation of this was: "There’s been so much discussion about the 4 year cycle, isn’t it less likely to have any impact?"

We can look at this a couple of ways:

First, the answer to these questions might be found by looking at an analogous situation: The Dogs of the Dow. This mechanical investing strategy simply buys the 10 Dow stocks which have the highest dividend yield in equal dollar amounts, and then holding them for one year (a variation is buying the 5 lowest price of these 10).

Since the early 1970s, this method outperformed the Dow or S&P handily — 17.7% annually, versus 10 and 11% for the SPX and DJIA. In recent years, the Dogs seem to have lost their ability to substantially outperform. The reason why, as far as anyone can surmise,  is that it got too popular. Perhaps prices on the Dow Dogs didn’t come down enough; maybe too many people piled into the stocks early. That process took several years to occur; Once enough people lose interest in it, it could become an outperforming strategy again.   

Secondly, I wonder if we are seeing an abbreviated version of that these days with many in vestors approach to some of the bearish cyclicality.

The four year cycle and the seasonal weakness of September have become fairly well known recently. But I do not see them as being as widely believed or acted upon. We had a few recent years where "Sell in May" did not work. And despite its track record, the four year cycle is hardly believed by the bulk of investors. That makes it less likely to fail ala Dogs of the Dow — i.e., due to popular enthusuiasm.    

From a sentiment perspective, it may have already happened.

Consider the May sell off — it might have been in anticpation of the 4 year cycle or the September October weakness. That led to an oversold condition, and the rally since the June 13th lows. Since so many people thought EVERYONE ELSE already knows about September/October, it could have been already discounted in market prices.   

Hence, many people already played the "Everyone is bearish about Sept/Oct, therefore it is built into in the prices" game. The early selloff and recovery could have already reflected the realization and subsequent dismissal of concerns about these issues.

As you can see, guessing what the dominant sentiment is rather  difficult proces. I prefer to stock with measures of sentiment reflected in actual buy and sell transactions. These are my favorites examples:

Put Call ratio

Arms Index


Rydex Ratio

Dow/Nasdaq ratio (both price and volume)

Mutual fund cash levels

Stock and Bond Fund inflow/outflow

None of these are flawless, but they are quantifiable, and reflect actual votes with dollars. I find that’s far more accurate than surveys or anecdotal sentiment discussions.

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  1. JGarcia commented on Sep 11

    “The four year cycle and the seasonal weakness of September have become fairly well known recently. But I do not see them as being as widely believed or acted upon.”

    Since hedge funds make up a very large percent of the trading volumes these days, and they are VERY aware of the cycles, you might be surprised. A look at the record short interest, might suggest that it’s already cooked in. Several of the catalysts that were to have sparked the freefall have reversed — oil to $100, skyrocketing inflation and rates, and a dollar freefall have all been wrong. We might see a big squeeze this afternoon on a patriotic salute to the 9/11 souls.


  2. Cherry commented on Sep 11

    But you are ignoring other “catalysts” which are going to make the market go lower whether they like it or not: Recession.

  3. Craig commented on Sep 11

    If they fully read the Bob Bronson article link in the linkfest they will know why this is so.

    History……hard to break that habit.

    OH, and “It’s different THIS time”. THIS time the inverted yield curve *doesn’t* signal recession. “THIS time housing is only 5% of the economy”

    Not with my money.

  4. Royce commented on Sep 11

    It reminds of an article on Jeremy Siegel’s view of the long run upward trend in stock prices, where movement around the trendline tends to have occasional drops 20-40% under the trendline. The article noted that you don’t need to have a sharp selloff to reach that 40% under trend mark so long as you have essentially sideways movement over a long period. Maybe that’s the situation were in now, with no big move down to be followed by no big move up.

  5. M.Z. Forrest commented on Sep 11

    There is the possibility the market will go up over the next 6 months. P/E’s will have to go up to do it, but it is possible. I don’t see how people can justify predicting a massive earnings expansion to support a higher market.

    Margin expansion doesn’t typically occur in a slowdown. There doesn’t appear to be a catalyst for margin expansion considering that software margins are even starting to decline. At an aggregate level, margins are at historically high levels. None of this adds up to massive earning expansion to me.

  6. S commented on Sep 11

    The deflation/disinflation trade continues. Gold now below its 200 day, which should create additional selling pressure. Oil, silver, copper getting raped.
    I sense a big fricking stock flush is coming sooner rather than later. I just hope they wait until after Friday to take the dump.

    I sold Sept. calls a couple of days before Labor Day against EVERYTHING I got long on the day the PPI report came out. This is one of the few times I REALLY hope they call my stock away.

  7. spencer commented on Sep 11

    Am I being too cynical but didn’t we see a significant drop in oil prices like we are seeing now just before the 2004 elections?

  8. Michael C. commented on Sep 11

    The market is always at any time full of trend followers, contrarians, contra-contrarians, etc.

    That’s what makes it a free open market. I don’t think now is different than any other time in the market.

  9. permabull commented on Sep 11

    Over the decades, I always found the overall market too hard to work out.

    A lot more workable was to have a list of good companies to hand – starting with 5 to 10 will do – and then buy them one at a time when they looked like fair value.

    Not cheap – just fair.

    Over the years, that list became my portfolio.

    It gets pruned a little and new companies get addded.

    I never could work out why – but it has been the way that I’m buying more of those good companies about once every four years and not doing a whole lot in between.

    In some of those good buying years, the P did all the value generating work; in others the E did. The truth is it doesn’t really matter how a good company gets to be fair value every few years.

    All that matters is that I’ve got a list and a rough idea of what fair value is for each company.

    Woody Allen once said that 90% of getting the job was turning up for the interview.

    With equities, 90% of getting money to live on is turning up with a list of companies to buy when they’re fairly priced.

  10. Alaskan Pete commented on Sep 11

    Speaking of contrarian…NYSE TICK levels are insane today.

  11. Brian commented on Sep 11

    Spencer – the thought occured to me in August that we’d see a big drop in gasoline prices before the election. I waffled a bit “no, that’s too cheesy and paranoid right?” but started selling my energy which I’ve been in danger of falling in love with. Looks like cheesy works sometimes. Election + usual fall shoulder season = energy bulls, it’s what’s for dinner.

    So you buy XLE after the election I guess?

  12. trader75 commented on Sep 11

    This kind of “game the gamers” stuff reminds of the Iocane Poweder scene in Princess Bride.

    Vincini: But it’s so simple. All I have to do is divine from what I know of you: Are you the sort of man who would put the poison into his own goblet or his enemies? Now, a clever man would put the poison into his own goblet because he would know that only a great fool would reach for what he was given. I am not a great fool so I can clearly not choose the wine in front of you. But you must have known I was not a great fool–you would have counted on it–so I can clearly not choose the wine in front of me!

    Westley: You’ve made your decision then?

    Vincini: Oh not remotely! Because Iocane comes from Australia, as everyone knows, and Australia is entirely peopled with criminals. And criminals are used to having people not trust them as you are not trusted by me so I can clearly not choose the wine in front of you.

    Westley: Truly, you have a dizzying intellect.

    Vincini: Wait ’till I get going!

  13. BDG123 commented on Sep 11

    Where do you see tick readings as extreme? We only hit 1000 once with the quick glance I took. That’s a multiple times a day, every day occurence in a bull run.

  14. Alaskan Pete commented on Sep 11

    BDG, I’ve got NYSE TICK on a 1 minute chart for today and it was hitting over 2000 on 13 occasions:

    12:06, 12:07, 12:11, 12:12, 12:22, 12:58, 13:01, 13:02, 13:12, 13:21, 13:22, 13:23, 13:28.

    Went over 1000 close to 50 times.

    Anyone trying to fade the +1000 today got kicked in the face.

  15. Value commented on Sep 11

    For the long-term investor, the fact that a particular approach (i.e. Dogs of the Dow / value investing) becomes the flavor of the month and then not does not necessarily warrant major concern if the underlying investment principles (value investing) are sound. The strategy may underperform one year, as it is too popular, but then turn around and outperform (i.e. ) after people have exited the strategy based on recent performance.

    For example, the Dogs of the Dow are actually up since the beginning of 2000, whereas other large cap indices such as the Dow and S&P 500 are not. Not not all that bad for the large cap portion of your portfolio.

  16. BDG123 commented on Sep 11

    That’s why………you measure it on a minute basis. I don’t. And, they aren’t getting it in the face right now. They were simply closing the gap over lunch hour.

  17. BDG123 commented on Sep 11

    Btw, I just went back and looked on the one minute………..and I didn’t exceed much more than one thousand on the one minute charts either. You are measuring instantaneous ticks not accumulated ticks. ie, Ticks reported every 15 odd seconds. We are looking at two totally different things. What service are you using to measure the data? It’s more useful accumulated. By my measurements, this has not been anywhere near a big day in regards to tick data……….Rally days are significantly strong than today.

  18. angryinch commented on Sep 11

    Spencer asks: didn’t we get an oil selloff right before the 2004 elections?

    Yes and no. Crude sold off 11% in the week prior to the 11/04 elections. But it had already ramped 36% from a late Aug low to the late Oct high. So it was still pretty close to its high at election time.

    I don’t see any evidence of monkey business in either 2004 or 2006. Just seems like the usual volatility surrounding a commode that has become a trading sardine for thousands of hedge funds and others.

    Actually, oil has more or less traded with the broader U.S. market over the past few years. So has gold and the related stocks. It’s not a perfect correlation, but a far cry from the inverse relationship during the ’70s commode mania.

    As Barry so often points out, just about everything appears to be “one trade” these days. On any given day or week, the relationships vary. But generally, when equities have been strong, so have the commodes. And vice versa. This is more or less true of global markets as well.

    No doubt this will unravel at some future point. But for now, everything moves up and down more or less in unison.

  19. philip k commented on Sep 11

    Hi Trader, I was waiting for someone to post that. The double reverse psychobabble has been getting ridiculous. I don’t know how anyone can make a single trade following all of these posts . .


    BR: Like the disclaimer says, this information is not for trading — its to give you broader perspective.

    The trading calls are all behind the subscription firewall: RR&A

  20. Cherry commented on Sep 11

    Oil has had a little impact over the last few years because it essentially caught up to its deflationary plunge in the late 90’s. We have had a modest “Commodity” bubble since 04, but nothing big.

    Nor will the lowering of Oil(gas prices) do much for the economy. The “leveling” off in consumer spending has nothing to do with Oil and more to do with a sluggish economy and busting housing market.

    Yet, the talking heads keep on acting like those energy prices really mean something. Move on and find the truth.

  21. OldVet commented on Sep 11

    India dropped 3.5% today in Bombay, Korea was down, Russia was down a ton, close to 5%. Those are the canaries in the mine, folks. Reminds me of May.

  22. whipsaw commented on Sep 11

    per B:
    “It’s more useful accumulated. By my measurements, this has not been anywhere near a big day in regards to tick data.”

    Sorry, you lost me completely on this B. Why would accumulated 15 second data of any kind be useful? I’m not even sure that Pete’s 1 minute data means much unless you are day trading or just trying to time an entry/exit.


  23. whipsaw commented on Sep 11

    per Cherry:
    “Oil has had a little impact over the last few years because it essentially caught up to its deflationary plunge in the late 90’s. We have had a modest “Commodity” bubble since 04, but nothing big.

    Nor will the lowering of Oil(gas prices) do much for the economy.”

    I would agree that falling fuel at the pump prices don’t make much difference at this point in the cycle (otherwise Transports would have shot up over the past week or two), but would otherwise disagree.

    Rightly or wrongly, oil has been the Big Gorilla most of the time since 1973. Falling prices don’t necessarily breed prosperity, but rising prices have invariably wreaked havoc, especially when they rise quickly. You can look at it on whatever timescale you prefer, but on a year to year basis, I think you’d have to agree that higher oil = bad for the economy in general.

    My guesstimate is that oil prices will spike up a bit Wednesday when the Nigerian workers go on strike, but otherwise be pretty much contained until after the elections. Then, it’s Katey, Bar the Door! and we get to explore $100/bbl over Xmas whether the gops are swept out the door or not. At that point, I don’t think that your “it doesn’t matter” thesis fails.

  24. whipsaw commented on Sep 11

    per me:
    “At that point, I don’t think that your “it doesn’t matter” thesis fails.”

    Cursed, lame typepad:
    At that point, I THINK that your “it doesn’t matter” thesis fails.

  25. A Dash of Insight commented on Sep 11

    How to Measure Sentiment

    Barry Ritholtz, as usual, has his finger on the pulse of an important market question: How to measure sentiment. In particular, how to determine whether widely known information is already factored into the market. Take a look at the excellent

  26. bt commented on Sep 12

    I think the percentage of traders to investors has gone up significantly. Market can’t support a high number of traders relative to the number of investors. Traders are supposed to be making money off of the slow moving investors. With too many traders in the game, they are now trading off of each other, making it a zero sum game (or worse, thanks to commissions and slippage). I don’t know how else to explain the seemingly random, trendless moves of the past few months. Yes, we have the occasional few weeks where there is a trend, but they are gone by the time one gets comfortable with the trend.

    There are many reasons to be skeptical about being a long term investor, but wall street marketing has made the average investor too complacent, so they simply stay put until it is time to panic. And the market, magically somehow pulls itself by its bootstraps as soon as critical support points are tested (Plunge Protection Team?) That leaves the mom-n-pop investor complacently parking their cash in paper assets but there is nothing to inspire the confidence of new investors. The only money that appears to be coming into the market is from the automatic investment contributions from 401(k) plans and similar programs.

    I think we are in for a sideways market for a long time (several years). Sharp selloffs will be met with buying. Sharp rallies will be met with profit taking. Until someday mom-n-pop wake up and realize that they would have been better off buying CDs. There will be a rush out of the stock market. And then it will be time for long term investors to gently tip toe back into the market and start investing the old fahioned way (i.e. buying companies that actually share a significant part of their income with their investors on a regular basis.) Until that time, treat stocks as pieces of paper to buy-and-sell on a short term basis. If the companies don’t provide an incentive to invest in their stock, why bother pushing that line of thought?

  27. Lama commented on Sep 12

    I like the parallel drawn in the quote, but is Vincini’s wording in the first quote the inverse of logic?

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