Feeling inspired by our new Trader Chats interview with Brent Donnelly, we decided to do a bit of a dive into why this prominent magazine cover seems to be The Ultimate Contrarian Indicator ☟☟
Trader Chats | April 13, 2023
☞ Before we start, Brent takes it as far as monitoring the performance of a hypothetical 1yholding portfolio, taking positions on the opposite extreme to The Economist Cover view.
READ BRENT’S MEDIUM ARTICLE HERE: A SOMEWHAT EMPIRICAL LOOK AT THE MAGAZINE COVER INDICATOR
☞ But Brent is not the only one picking up on this pattern.
Also, check out Jim Bianco on Twitter for further looks into The Economist’s latest cover.
σ Imagine sippin’ your morning coffee and spotting a headline about the “astonishing” US economy.
But wait, don’t go running to action this news!
Remember the adage:
“When news makes it to the front page, it’s probably old news.”
And the fact that we are talking about “The Economist Cover Phenomomen” right now points to this adage tending to be true.
σ You see, financial markets are the beating heart of modern economies.
They serve vital functions like resource allocation, price discovery, risk management, liquidity provision, and info dissemination.
In other words, they’re the lifeblood of economies.
Ingrained in these efficient markets is the magical discounting mechanism by which they are ruled.
So, what exactly is the discounting mechanism?
σ It’s basically future cash flows & risks turned into present value.
These mechanics, especially with the rise of tech, run like a well-oiled machine for valuations, capital allocation & risk management.
Time value of money + risk = today’s value.
Let’s now travel back from the theory to what goes on in actuality.
σ In the fast-paced world of financial markets, savvy investors are always hunting for the next ample opportunity with resources and capital worth in the billions.
These are very sophisticated players!
Inevitably, if certain news makes it to the front page, chances are these pros have already dissected, analyzed, and acted upon it.
σ So, if you’re just hearing about a hot take by The Economist, you are very likely to be considerably late to the party.
The market already adjusted a while ago, and the juiciest profits?
They’ve come and gone.
The trade you thought was brilliant is now crowded, and you are exit liquidity, my friend.
What does this mean?
σ It means that it pays off to develop a well-researched contrarian stance.
Look for undervalued or overlooked assets that the market still needs to catch on to.
But if the markets are so efficient, how can these opportunities exist?
Because in reality, markets are not perfectly efficient due to various factors such as human behavior, market frictions, and information asymmetry.
σ This creates opportunities for investors to capitalize on by:
➠ FUNDAMENTAL ANALYSIS
Studying future scenarios today.
i.e – financial health, management, competitive & growth prospects…
➠ TECHNICAL ANALYSIS
Study historical price patterns & market data to predict future movements.
Spot trends, support/resistance levels, and lean on trusty indicators.
➠ BEHAVIORAL FINANCE
Human emotions & cognitive biases cause price deviations.
Understand irrational investor behavior to capitalize on market inefficiencies.
Spread investments across asset classes, industries & regions to reduce risk.
While increasing your chances of identifying profitable opportunities.
➠ RISK MANAGEMENT
Establish disciplined processes like stop-loss orders, position sizing & portfolio reviews to protect your investments.
➠ CONTINUOUS LEARNING
Absolutely crucial for long-term success.
Stay updated on market news, run a diary, learn from past decisions & refine your process.
Discipline, tenacity, and staying power can carry you a long way.
This is obviously our favorite of the bunch.
Not just finding the inefficiencies in the market listed above but being able to dive even further into volatility to look for opportunities.
But also a way to confirm or invalidate your views by seeing if the align metrics like implied vol, skew, term structure, and more!
And if none of that works for you, simply do the opposite of everything The Economist puts on their cover
As Brent Donnelly shows, you may not do too bad…
☞ Ready to continue taking your trading and options education to the next level?
We can help!
We’ll be holding our first Options Trading Bootcamp of the year on April 29-30.
A virtual deep dive into the world of options, with a syllabus & teaching to strengthen your options game no matter your experience level.
There’s no better time to learn how to profit from volatility than right now.
We, unfortunately, have a limited amount of attendees allowed on the call at once, so click the link below to register ASAP ↴
Q2 2023 OPTIONS TRADING BOOTCAMP
☞ Thank you for making it this far
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