Fading the Crowd

 | Dec 14, 2011 | 1:31 PM EST  | Comments
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Stock quotes in this article:

cop

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xom

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cvx

This piece originally appeared on Options Profits.

The stock market does not discount the same news twice, much less 10 times. This Europe-trashing noise has been discounted ad nauseam, but it still grabs the headlines. But in my book, if you focus your mind and energy where the financial news is tuned in, you will never get it.

Financial news is far more concerned with stories that allow media outlets to sell content. The hope is that folks like you read the advertisements attached to that news story. But the news being reported has already been discounted many times over by the time you read it.

So, with that in mind, what else is already discounted? Here's my brief list:

  1. Earnings of U.S. banks for 2011: Expect fair numbers to be reported, the dividends not to be raised and the word "plight" attached by some to their forecasted 2012 earnings. If you are a contrarian like me, you are licking your chops as we move closer each day to the "all clear" for our banks. That day is coming because our banks spent the past four years discounting the end of the world as we know it.
  2. Oil moving up well over $100 a barrel: I highly doubt this one. The contrarian thinking is that oil supply is going to rise in tandem with the demand for it. New supplies coming to the market should be able to meet growing demand once the world economy is back on track. Thus oil is probably not going to the moon, but supply should still chase price. Paradoxically, the contrarian is a buyer of major oil companies such as Chevron (CVX), ConocoPhilipps (COP) and Exxon Mobil (XOM).
  3. Interest rates staying at record low rates of return: Much higher rates than today could be the shocker of 2012. Shorting against those who are long bonds is the ultimate contrarian trade waiting in the wings. Fortunes will be made in this decade by the next gang of bond vigilantes. The Fed cannot fight the interest rate cycle and probably does not want to. I bet the Fed cannot wait to let rates rise, because such an action would be the big tell pointing to sunny days for global economies.
  4. The stock market staying rangebound for 2012: Ain't gonna happen. Instead, expect either the bears to win big and early or the bulls to crush the bears. Now, before I am accused of riding the fence, let me state I am a bull going into 2012. The more confidence gained, the more bullish I will become. If that move is disbelieved and ridiculed by the same ole perma-bears I have grown to detest, then I think the S&P 500 and the Dow could test their all-time highs in 2012. (Oh, bull markets sell ads too -- lots of them.)
  5. As goes the euro, so goes the Dow: Well, in October 2007, the Dow was around its all-time high while the euro was at $1.45 against the dollar. In July 2008 the Dow was at 11,000 and the euro had climbed no less to $1.59. By October 2008 the Dow was at 8800 while the euro was at $1.34. Go to October 2009 and find the euro at $1.50 and the Dow at 9500. I could go on, but you get the point: Whatever the latest gurus are espousing, the facts do not support any serious correlation in either direction for the euro/Dow comparison. For 2011 the euro began this year around $1.34 while the Dow began 2011 around 11,600, so the euro is down about $0.04 and the Dow is up about 500 points so far in 2011. If you see a positive correlation in that comparison, please let me know. No matter where the euro is heading, you'd better not use tracing paper to guess the same for the Dow.

This list is subject to revision because all estimations should be taken using present knowledge combined with experience and a dose of prescience. Prognostications should never be accepted by any trader as being factual enough to use for speculative trades until they become accepted and worthy of reporting by the financial news. Should that become the case, the contrarian must then decide when to leave the growing throng of new converts.

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