Looking at the accuracy of recent contrarian indicators, Rocky White.

You might be familiar with our contrarian philosophy of trading. In short, as contrarians, we look for stocks that have had bullish stock price action and despite that, investors continue to have doubts and negative feelings about the stock. The idea is that the large number of doubters represents a lot of sideline money. As the stock moves higher and higher, at some point those doubters capitulate, and if they all pile in at once, that creates a fast and furious rally in the stock, which is especially profitable for option players like us.

If the capitulation does not occur all at once, it can play out over a longer period, initiating a long-term steady rally which can also be very profitable. Similarly, for bearish bets we look for the opposite setup; negative price action for a hyped-up stock.

As we get to the end of 2019, I’m looking at what stocks would fit these criteria. It may give us a pretty good list of trade ideas going forward.

BULLISH AND BEARISH CONTRARIAN SETUPS

To find a list of bullish setups, I first looked for stocks which have outperformed the S&P 500 Index (SPX) this year. With the index up more than 25% so far, any stock that beats this has positive price action. To layer in sentiment, I looked at multiple data points to confirm investors had become more bearish on the stock. Specifically, I included stocks where option players, short sellers, and analysts were all showing a more bearish view on the stock. Specifically, here are the criteria for this screen:

  • The year-to-date return is better than the SPX.
  • There was an increase in short interest.
  • Percentage of analyst "buy" ratings declined on the year.
  • The Schaeffer’s put/call open interest ratio (SOIR) is greater than one.

This is a pretty good starting point if you’re looking for some bullish stock trades going forward. See table below for stock fitting this criteria.  

Bullish Contrarian Setups

Naturally, I reversed the criteria to find stocks that we may look at for bearish stock plays, or maybe simply stocks to avoid. Specifically, the criteria are:

  • The year-to-date return is negative.
  • There was a decrease in short interest.
  • Percentage of analyst "buy" ratings increased on the year.
  • The SOIR is less than one.

The table below are stocks that fit this criteria.