If you want to make money in commodities, then you have to be a contrarian. You have to go against the herd and trade the opposite of the popular opinion.
That’s hard to do. And, from personal experience, it’s hard to write about – because it invites criticism.
And let’s face it, most of us would rather have other folks agree with our opinions, and tell us how smart they think we are, than to challenge the popular thought and endure whatever wrath that entails.
Most of the time, though, the more praise I get for an investment idea, the more likely I am to lose money on it. On the other hand, when I get called a “moron” for suggesting that an out-of-favor asset might look like a good trade, it almost always pays off.
Take oil for example…
I turned bullish on oil and oil stocks in late August. The energy sector had been lagging well behind the broad stock market. So, it seemed like a “catch-up” rally was in order. The price of oil was stuck in a relatively tight trading range that could break either way. But, given the setup for the oil stocks, I figured the most likely outcome was for a rally in the price of oil.
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Most readers agreed with me. “What a great contrarian idea,” one reader wrote. “I’m all-in with you on the oil trade,” said someone else.
While I enjoyed getting such positive feedback, in the back of my mind I thought, “Uh-oh.”
Sure enough, oil broke down. The price of the gooey black stuff fell 12% in about a week. And, the energy stocks did even worse – with the Energy Sector Select Fund (XLE) dropping 20%.
So, I did what any self-respecting contrarian trader would do – I doubled down. It was the “redemption trade” as I called it. In October, I wrote, “If oil can break out to the upside of its trading range, then it could rally back up to the March high near $47.50.
Readers then voiced their opinions…
“You’re an idiot.”
“The worst idea I’ve ever heard.”
“Haven’t you ever heard not to throw good money after bad?”
“I will do the opposite of you and retire early.”
Of course, nobody likes getting such negative feedback. And frankly, it did sting a little. But, in the back of my mind, I knew this was a good sign for a contrarian trade.
In the past two months, oil has rallied 15%. XLE is up 50%.
Whether you bought in August or in October, you’re in good shape on the oil trade.
But now… being bullish on oil is, all of a sudden, no longer a contrarian idea.
Just about everybody loves oil and oil stocks. All of the financial TV talking heads – who mocked the idea of buying energy stocks two months ago – now love the energy sector.
“The economy is opening up,” they shout. “And as the economy grows, energy should do well.”
I’m not so sure.
Last week, the price of oil hit my upside target of $47.50 per barrel. And, XLE closed Friday more than 22% above its 50-day moving average (MA) line. That’s a historically large gap.
So, I’m thinking the energy sector is due for, at least, a pause in its current rally. And, it may be due for a bit of a decline.
Either way, buying oil and oil stocks no longer feels like a contrarian trade. So, it’s time to sell the energy sector – at least for the short term.
But… my point to all of this is that if you want to profit in the commodity markets, then you need to do what most folks think is stupid.
It felt like a contrarian trade to recommend buying oil in late August. But, most folks thought that was a good idea. It wasn’t a
“stupid” idea until I reiterated my bullishness on oil in October. Folks who bought then recorded the best profits.
So… what feels “stupid” to buy right now? Well, I have my own ideas, and I’ll share those with you in the weeks ahead.
But, I’d love to know what you think the best contrarian trade is in the market right now.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Are you following Jeff’s contrarian advice? Has going against the “herd” caused significant gains instead of a loss? Did you “feel stupid” about making contrarian trades?
Let us know your thoughts – and any questions you may have – at [email protected].