Determining the Contrarian Position

Continuing our analysis of the Contrarian Approach to investing, a concept we strongly endorse, we run headlong into the question:  Where is the crowd?  We want to be somewhere else!

Much of the opinion about market sentiment is anecdotal.  Those with contacts in the hedge fund community claim to know which way positions are leaning.  Others look at forecasts or sentiment indicators.  You can look objectively at a number of quantitative indicators, as we see in this Barry Ritholtz analysis.

Do these indicators capture the current situation?  A Cody Willard story yesterday explored several themes that match out own observations.

  • The Bears reign on Wall Street, according to the read of his networks.  It is anecdotal, but he is well-placed to know.  I might add that long-only managers are not getting inflows and that hedge funds use leverage, increasing their impact.
  • Sentiment indicators like AAII’s miss the mark — because….
  • The individual investor is out of the market.  This is the big one.  Cody’s conversations in his travels square completely with ours.  People lost money in 2000 and they have moved to the sidelines.  Many have turned to second and third homes and investment real estate.
  • The economic news has been given a bearish twist by people, even though their personal circumstances are fine.

It is a nice article, but it would be even nicer to have some quantitative measures to back it up.  We will outline some indicators in our Contrarian Picks for ’06.

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