The Ultimate Contrarian Trade
by Jeff Clark
August 24, 2006
Two weeks ago, I told my Short Report subscribers it was time to short oil. I have to tell you… that was a really tough recommendation.
Short oil?? It’s an absurd idea… laughable really. Who in their right mind would think of shorting oil when the whole world is fighting over the stuff?
In fact, two weeks ago it was hard to imagine a more bullish environment for oil. That’s exactly why it made sense to short it.
Just as the best time to buy an asset is when no one else wants it, the best time to sell is when people are jumping all over themselves trying to buy it.
Two weeks ago, the folks in the Chicago Mercantile oil trading pit were jumpier than a group of six year olds in a backyard bouncy house.
But the main reason to short oil was because the public was enormously bullish… and let’s face it: The public is notoriously wrong when it comes to market direction.
The public turns bullish on stocks at the absolute high and bearish at the absolute low. The public becomes convinced that “you can’t lose money in real estate” precisely when the probability of losing money is the highest. The public refuses to buy gold at $240 per ounce, but clamors to buy all it can get at $720.
Right now the public loves oil.
And no wonder… All you have to do is turn the television to any business station and listen for a few minutes. Everyone’s talking about terrorism, lack of new supply, and $100 oil.
$100 oil is a foregone conclusion. It’s as if the difference between oil’s current price and the $100 target is just a minor adjustment – a rounding error.
It seems to me the current “$100 oil” crowd sounds a lot like last year’s “can’t lose money in real estate” crowd, or the “$1,000 gold” crowd from three months ago.
We may eventually see $100 oil - just like we may see $1,000 gold. But it’s not going to happen with the public on board. And it’s not going to happen without a significant correction first.
We’re up about 6 points, or about 8% on our short oil trade. That’s not too bad for two weeks… and I think we have more gains to go.
It’s always tough to be a contrarian – to trade against the crowd. But it’s almost always the right thing to do.
Best Regards & Good Trading,
Jeff
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