"When everyone thinks alike, everyone is likely to be wrong."
~ Humphrey Neill, The Art of Contrary Thinking
The above quote has been reiterated numerous times in our publications because of its ability to succinctly capture the essence of contrarian thinking. While simple in theory, the task of capturing the prevailing sentiment can be as elusive as defining the boundaries of a cloud. The closer you get to it, the harder it is to see.
Even Humphrey Neill admitted the difficulties inherent in gauging sentiment:
"I found in my own case that it took several years, as a matter of fact, before I was able to weigh 'public opinion' with sufficient accuracy to feel reasonably confident of the contrary conclusion. It takes time to form the habit of thinking contrarily…I grant you that you will have to peruse a pile of news and comments."
Regular Schaeffer's readers are well aware that we use "hard" data such as put/call ratios and short interest to gauge the sentiment of stocks, sectors, and the market as a whole. Graphs and numbers are easy to quantify and show. What is not so easy to convey is the sentiment that is gathered from poring over numerous publications and scanning various news outlets. This information is embedded in our approach and used to make trading decisions.
At Schaeffer's, we have a team of analysts who track this "anecdotal sentiment" and pull it all together for our in-house research. The amount of information available is overwhelming and it would be impossible for one individual to stay on top of it all. Noting that Neill himself acknowledged the complexity of tracking numerous publications and the need for experience, we have launched a new column, "Schaeffer's Daily Contrarian."
This daily column will post summaries of current articles and provide a short take on how we view the article in a contrarian light. Some entries will give you insight into how we read media articles and how to merge small morsels into a tasty contrarian meal. Our goal is to constantly scan various media and news outlets every trading day and present some of what we feel provides a good contrarian read. We should note that not all articles will lend themselves to a contrarian interpretation. In fact, most will not.
What This is Not
First and foremost, "Schaeffer's Daily Contrarian" is not meant as a trade recommendation. These articles and our contrarian interpretation are but a small piece of a much larger analytical puzzle. Gathering anecdotal sentiment from a variety of sources and merging this with hard data is the hallmark of contrarian analysis. Here you get a first-hand account of how to go about this in real time.
It's also important to understand that getting a contrarian read from an article is by no means a poor reflection on the publication or its writers. A negative article on a high-flying stock may site accurate facts and be extremely logical. And more importantly, it could ultimately prove to be correct. However, experience has taught us that uptrends do not end until the final capitulation where it seems that everyone has finally given up their concerns. The market has shown time and again that short-term moves are often driven purely on emotions. By monitoring the comments made by analysts in the media, we can add this to our contrarian arsenal to gauge whether the capitulation stage has finally been reached.
At Schaeffer's, we have the years of experience and the ability to "peruse the piles of news." More importantly, we are willing to share it with you every day. It's almost like having your own personal team of contrarian analysts gathering and summarizing anecdotal information. We hope "Schaeffer's Daily Contrarian" becomes a resource you value as much as we do.
