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For Contrarians, It’s Time to Go Short

It’s hard to be bearish right here… unless you take a contrarian stance.

Traders should be looking to add some short exposure this week.

Now, I’ll be the first to admit… It’s hard to be bearish right here. The stock market hasn’t done anything wrong. In fact, it’s been doing everything right.

The S&P 500 has rallied up to – even surpassed – my 2505 target. It has been making new highs almost every day over the past week. And it’s making those new highs in a slow, grinding fashion that keeps the technical indicators from overheating and stretching into overbought territory.

So, like I said, it’s hard to be bearish right here.

But, from a contrarian perspective, being a little bearish sure feels like the right posture. Let me explain…

Three weeks ago, as we headed into the seasonally weak month of September, it seemed just about everyone was leaning bearish. Indeed, on August 31, according to the American Association of Independent Investors (AAII) only 25% of survey respondents were bullish on the stock market. Forty percent of respondents were bearish, and 35% were neutral.

That was the smallest number of bulls since mid-May. It was the largest number of bears all year.

Since September 1, the stock market has enjoyed a slow and relentless grind higher. The S&P 500 is up almost 60 points, and the index seems to make new highs almost every day.

As you might have guessed, this action has caused investors to reverse their opinions. AAII bulls are now up above 41% – the third highest level of the year. Bearish investors are down to just 22% – the lowest level of 2017.

So, as a contrarian trader, it seems far more appropriate to be leaning bearish now than it was three weeks ago.

It is September, after all. Stocks tend to have a tough time during the months of September and October.

I closed out my short positions and moved to the sidelines three weeks ago. Now, though, it feels like a pretty good time to start slowly adding some short trades back.

Best regards and good trading,

Jeff Clark

P.S. With the market at new all-time highs seemingly each day, are you making any contrarian bets? Send me your thoughts – as well as any questions, comments, or suggestions – right here.