The best contrarian indicator you've probably never heard about just flashed a "buy" signal. Contrarians buy when everyone is selling and sell when everyone is buying. They profit from fear and greed and take positions contrary to the emotional factors driving many investors.
Some contrarians use sentiment surveys, for example, to analyze the mood of the market. There are several organizations that ask traders whether they expect stocks to go up or down and this survey data can help traders identify significant turning points. Unfortunately, this is not a fool proof strategy. The crowd is right for a time and the extremes in sentiment can only be known with certainty in hindsight.
This indicator is different. It rarely gives a buy signal so most traders aren’t even aware of it. That doesn't stop it from being wildly profitable. Traders could have booked an average gain of 35% in a year and 100% after three years following this indicator.
Here's the thing. It's only given a "buy" signal eight times in the past 97 years, and right now it's saying to buy one of the most "hated" countries in the world.
Recent test results from Mebane Faber (author of The Ivy Portfolio) shows that buying a country after a very steep decline can be profitable. He used fundamental data to test this idea. Faber found that whenever the 10-year cyclically adjusted price-to-earnings (P/E) ratio falls below 5 for a country’s stock market, the country is a buy. This is the P/E calculation favored by Robert Shiller in his book, Irrational Exuberance.
Faber found that this P/E ratio fell below 5 only eight times in his database of 32 countries with records that goes back to the early 1900’s in some cases. After this rare event, the market was up an average of 35% a year later and 100% within three years.
Today, we have the ninth signal from this indicator as the CAPE reached a value of 2 for Greece. The news from Greece is bad but the market has already turned up so now could be the perfect time to take the trade.
For US traders, there aren’t many trading options for Greece. There is only one ETF available that offers direct exposure to the Greek stock market. Global X FTSE Greece 20 ETF (GREK) has a short trading history of about 7 weeks which makes analysis difficult. It holds 20 Greek stocks.The ETF is now 25% above its lows and could indicate the worst news has been factored into its price.
Given the short trading history of GREK, it’s not possible to define a stop loss based on support levels or indicators. For now, all we have is a 20-day moving average. In a few weeks, there will be enough trading history to calculate a 50-day moving average and that could be used as a stop level. This is a long-term trade with big potential, but traders should expect volatility as the situation in Europe unfolds. The 50-day moving average, when it can be calculated, should give the trade room to run.
A year from now, the news may be better and value investors may be rushing into Greece. That could be the time for contrarians to exit a trade with a significant gain.
No comments:
Post a Comment