Contra market
What is a cash-on-delivery market?
A contrarian market is a description of an asset or investment that moves against the general market trend. Opposing (or contrarian) stocks and market sectors tend to have a negative, or weak, correlation with the broader market index and general economic index. When the economy is weak or stock indices underperform, the opposite segments outperform and vice versa.
One of the advantages of opposite markets is that they tend to get out of hand when the broader market is doing well, which can provide opportunities for value investors to grab a few trades.
KEY FINDINGS
- A branded market is one that moves against the tide of the larger market and tends to have a negative correlation with it or at least a relatively low
- Investors use opposite markets to hedge, make contrarian investments or diversify their
- Investing in opposite markets during a big market rally could mean losing returns during a bull run.
Understanding a Marked Market
A counter-market stock or sector is a stock that performs well in down markets and underperforms in up markets. For example, defensive stocks, supposedly for their relative immunity to economic cycles, such as big pharma and utilities, may outperform (but not necessarily increase in value) during bear markets due to their earnings and their stable cash flows. However, they may not fare as well during bull markets when investors favor equities and riskier sectors such as technology and commodities.
Marking Market Strategies
Marking market strategies are employed for a variety of reasons. An investor may believe that the market as a whole will decline and therefore wishes to obtain some protection, or even a profit, by transferring part or all of his funds to counter markets. Or perhaps the investor is a maverick, which means they prefer to buy or sell assets that go against the grain of the market or the economy in general. The investor may also simply want to diversify and not just hold assets that tend to move in the same direction.
Hedging
Investors can use simple counter-market strategies to hedge their portfolios. For example, if an investor’s portfolio is heavily exposed to equities, they may buy an asset class typically considered a haven, such as gold, to protect against a sharp decline in the stock market. Investors can buy physical gold from government mints, precious metals dealers, and jewelers, or via futures contracts on an exchange. Buying a gold-traded fund (ETF) such as SPDR Gold Trust Shares (GLD) is another way for investors to gain exposure to the commodity.
Investing Contractions
The use of market strategies can help investors contrary to a profit against the crowd. Adding stocks or other assets that have a low or negative correlation to the stock market can help smooth out some of the ups and downs in portfolio returns.
Diversification
Using contrarian markets can help an investor diversify. Keeping only stocks that are moving in the same direction can work well when the stock market is up, but when it is down, so will all of the holdings in the portfolio. Adding certain stocks or other assets that have a low correlation, or negative correlation, with the stock market can help smooth out some of the ups and downs in portfolio returns.
Advantages of investing in opposite market sectors
During bull markets, cyclical sectors such as technology and financials perform well and become more expensive in terms of price, while opposite market sectors such as consumer basic services and public services are underperforming. This offers investors the opportunity to accumulate contrarian market share at lower prices and more attractive valuations.
For example, while the US economy performed well in the first half of 2018, FANG tech stocks outperformed the broader market. As a result, public service obligations were no longer in vogue and therefore cheaper. This may have prompted some reluctant investors to start accumulating positions in these underperformers in hopes of performing better in the future.
Disadvantages of Investing in Marker Markets
While marker markets provide a potentially safer or more profitable place when the market or the economy as the direction of a whole change, holding opposite assets during a major bull market could mean losing money. significant returns from the broader market.
Over 5 years between May 2014 and 2019, the SPDR SandP 500 (SPY) returned over 50% while the SPDR Gold Trust Shares (GLD) returned 3%. Participating in the big bull stock market was safer to play than hoping for gold to find its base.
