Schaeffer's Senior Market Strategist on Contrarian Trading

According to Timpane, mental attitude is important in contrarian trading

Managing Editor
May 7, 2021 at 8:00 AM
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Last month, Senior Market Strategist Matthew Timpane stopped by Benzinga  was a featured presenter at the April 2021 Benzinga Boot Camp and discussed “Finding an Edge to Your Options Trading.” You can view the entire presentation at https://benzinga.wistia.com/medias/q46jcrme4x 

Below is an excerpt of the article, which can also be found here.

Attitude is everything in the world of trading, according to Schaeffer Investment Research’s Matthew Timpane who is a senior strategist for the now 40-year old company. Speaking at the April 2021 Benzinga Boot Camp, Timpane discussed at length how a trader’s mental attitude can determine success in the market.

“You need to change your mindset from what got you successful, either in business or sports in school because constantly digging in and pushing forward isn’t necessarily the best method in trading,” he said. “You need to learn to let go at the end of every market day and when you’ve completed your recap and last-minute research, don’t bring it home and put it on your family and friends.”

 

Timpane says that at Schaeffer’s, Expectational Analysis® is an extremely important part of their trading process, enabling them to take a contrarian approach, researching market segments that don’t necessarily mean trading against the trends, “but looking for pessimistic market participants in a stock that is bullish. It gives us the most bang for our buck” Timpane shared some of the key facets of Schaeffer’s Expectational Analysis® approach with a focus on sentiment-based indicators.

Open Interest Configurations

We look at these and we have screens that tell us where stocks have high levels of concentration. On buys to open calls or puts (mostly retail), we are able to look into this and see who is selling and buying and it gives us an edge. Kroger (KR) stock as an example had a huge 35 put strike level, so when it broke above it, you knew that could be supportive. Since then it’s been a pretty good trade and we’re still in this thing.

Put/Call Volume Ratio

These are unique and we identified that Kroger had a tendency to price appreciate when call volume was rising. We identified that the stock was indeed rising and because it’s a 50-day ratio, we knew that there are more put buyers than call buyers, and it’s going to give us an opportunity to get into this thing as people are pessimistic in a bullish chart pattern. We not only do that on individual stocks for subscribers but we do this for analysis.

Short Interest

It’s very common that other people look for stocks with high short interest for potential squeeze opportunities after the recent price actions we saw with GameStop (GME) and AMC Entertainment (AMC) earlier this year. But we’ve been doing this for years. We look for stocks that are either in short recovery mode or short interest is rolling over from highs and sometimes we find stocks that increase in price as short interest increases. Not all stocks act alike and we find that kind of interesting.

Looking for Catalysts

When trading we’re not necessarily looking at discounted cash flows or discounted models from five to ten-year evaluations. We’re looking for catalysts that can move stock in a short time period because understanding where a company will be in a decade doesn’t really give us much of an edge. The fundamentals you’re really looking at when trading is earning surprises and history, insider transactions, and stock buybacks.

Don’t believe everything you’re told. Don’t choose stocks based on things you read on Twitter. Some people are buying the next big thing and you may hit a winner like Tesla but there are also multiple Sun Edisons out there, which a while back was one of the largest wind and solar plant companies and went bankrupt twice under different names.

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