To be a successful contrarian investor, you need to follow Buffett's simple philosophy: Be greedy when others are fearful and be fearful when others are greedy.
In other words, a contrarian investor will look for opportunities to buy when there is blood on the streets and experts are advising that the economy will get a lot worse before it gets any better.
Likewise, a contrarian will look to book profits when the stock market is rising to new highs and everyone and his brother-in-law is offering tips on what to buy.
Simple, right? But almost impossible to follow when it is your own money on the line. The human brain seems to function irrationally when monetary transactions involve uncertain outcomes - like in the stock market.
Doing the exact opposite of what a consensus view is suggesting requires training and discipline. Knowledge of basic technical analysis tools can be of great help.
Here are some typical contrarian signals that even novice investors can learn to spot:
1. A stock's price is touching new highs, but volumes are falling
2. An index keeps rising but technical indicators are flat or falling
3. A stock's price touches a new low, but technical indicators touch higher bottoms
4. Widening distance between a stock's price and its 200 day EMA
5. An index is moving up but the number of declining stocks is more than the number of advancing stocks
The above list is not meant to be exhaustive - just indicative.
Being able to spot certain chart patterns that indicate the opposite of what the price action is suggesting can also help a lot. E.g. a stock's price is falling but trading within a 'falling wedge' pattern indicates a likely breakout upwards.
Similarly, if a stock's price is rising but trading within a 'rising wedge', it is a signal for a correction.
Needless to say, buying or selling a stock just based on price patterns and contrarian indications is not enough. Adequate research about a company's financials and investment-worthiness should be carried out before taking any buy/sell decisions about its stock.
Also, refrain from buying or selling just because a stock has risen 20% or an index has fallen 20%. A rising stock can rise even higher, and a falling index can fall even lower.
How does one know beforehand how far a falling index will fall? What if it falls first, then rises again before falling even further?
One really can't tell beforehand. Again, some knowledge of technical analysis can be helpful.
Those who have been regularly reading my posts know about long-term 'support-resistance' levels and Fibonacci retracement levels - and the roles these levels play time and again.
Most important of all, to be a really successful contrarian investor, you need to have oodles of patience. Waiting for the right price to buy or sell - without trying to catch the exact market bottom or top - will add several percentage points to your eventual returns.
FIIs were net buyers of equity worth Rs 50.6 Billion during the three days of trading this week. DIIs were net sellers of equity worth Rs 32.9 Billion, as per provisional figures.
Steel exports in Feb '17 (at 0.75 MT) was up by 150% over Feb '16, but declined by 15% over Jan '17. Imports in Feb '17 (0.49 MT) was down by 46% over Feb '16 and by 19% over Jan '17.
The government is talking to almost 300 Indian and foreign companies for proposed investments of US $62 Billion, of which nearly half is expected from Chinese companies.
The daily closing chart pattern of Nifty is clearly hesitating near its previous (Sep 8 '16) top of 8953. Proximity to the psychological level of 9000 and uncertainty about the upcoming state election results on Mar 11 have kept bulls in check.
All three EMAs are rising, and the index is trading well above them in a bull market. However, for the past two weeks, the index has touched higher tops while the three daily technical indicators have touched lower tops.
The combined negative divergences can lead to some correction or consolidation. A sharp correction (4-5%) can occur if the BJP does not fare well at the polls - particularly in UP.
Nifty's TTM P/E continues to hover above 23 - well above its long term average. The breadth indicator NSE TRIN (not shown) has emerged from its overbought zone. Index upside appears limited.
(A friend - to whom I had recommended a textile exporting company back in Nov '16 - called me yesterday to say that the stock has gained 40% and asked whether it would be OK to buy at the current price. Such queries often indicate an intermediate top!)
If you are ready to jump into the market feet first, take another look at the chart. The index has gained 1100 points (~14%) in less than 3 months. This is a time for cautious optimism and partial profit booking, not euphoria.
WTI Crude Oil chart
The daily closing chart pattern of WTI Crude Oil shows a sideways consolidation with an upward bias for the past 10 weeks, and appears to have formed a 'rising wedge' pattern.
Oil's price is likely to correct downwards from the 'wedge'. Stronger volumes on recent down days are indicating that bears are sensing an opportunity to attack.
Daily technical indicators are looking bearish. MACD is sliding down below its signal line in positive zone. RSI has slipped below its 50% level. Slow stochastic has dropped to the edge of its oversold zone.
All three indicators are showing negative divergences by touching lower tops (marked by blue lines) even as oil's price touched a higher top. Some more consolidation is possible before oil's price makes a decisive move.
Oil's price is trading well above its rising 200 day EMA in a bull market. However, concerns about rising US shale oil output offsetting production cuts by OPEC and non-OPEC members have kept oil bulls on tenterhooks.
On longer term weekly chart (not shown), oil's price is trading above its rising 20 week and 50 week EMAs, but below its falling 200 week EMA in a long-term bear market. Weekly technical indicators are in bullish zones, but not showing any upward momentum.
Brent Crude Oil chart
The daily closing chart pattern of Brent Crude Oil has been consolidating sideways within a 'symmetrical triangle' pattern for the past 10 weeks.
'Symmetrical triangle' patterns are often continuation patterns. Since oil's price formed the 'triangle' after a sharp up move, the eventual breakout from the 'triangle' should logically be upwards.
However, a 'triangle' can be unreliable. So, oil's price may correct downwards.
There is also a possibility that the price continues its consolidation and emerges sideways through the apex of the 'triangle'.
In other words, one should wait for a decisive price action before taking a buy/sell call.
Daily technical indicators are looking bearish. MACD is sliding down below its signal line in positive zone. RSI is moving sideways in neutral zone. Slow stochastic is falling towards its oversold zone.
Oil's price is trading above its rising 200 day EMA in a bull market. Production cuts by OPEC and non-OPEC countries have not removed the supply glut in the oil market, keeping oil's price range-bound.
On longer term weekly chart (not shown), oil's price is trading above its rising 20 week and 50 week EMAs, but below its falling 200 week EMA in a long-term bear market. Weekly technical indicators are in bullish zones, but showing a bit of downward momentum.
S&P 500 index chart pattern
The daily bar chart pattern of S&P 500 shows that bulls are in a rampaging mood. The index consolidated sideways in a narrow 12 points range during the first two days of the week (last two days of Feb '17).
On Mar 1, the index opened with a big upward 'gap' and strong volume support. It rose to touch a new lifetime intra-day high of 2401 before correcting a bit to 2396 - a new lifetime closing high.
During the next two days, the index corrected a bit more but managed to close above 2380 on both days and partly filled the 'gap' of Mar 1.
Daily technical indicators are inside their overbought zones, but are in the process of correcting overbought conditions.
The US Fed has hinted at a hike in interest rates during Mar '17. That should strengthen the US Dollar and propel the index even higher.
The index is trading well above its three rising EMAs in a bull market. A correction is overdue and will improve the technical 'health' of the chart. But a correction doesn't happen by wishing for it.
As long as bulls are making merry, just maintain a trailing stop-loss and enjoy the ride.
On longer term weekly chart (not shown), the index closed at a new lifetime high and is trading well above its three rising weekly EMAs in a long-term bull market. All three weekly technical indicators are looking quite overbought.
FTSE 100 index chart pattern
The daily bar chart pattern of FTSE 100 had been consolidating sideways within a 'symmetrical triangle' pattern after touching a high of 7354 on Jan 16 '17.
On Wed. Mar 1, the index broke out upwards from the 'triangle' with a volume surge and touched a new lifetime high of 7383.
The next day, it rose even higher to touch a new lifetime high of 7395, but closed just below its opening level of 7383 to form a 'doji' candlestick pattern (which indicates hesitation among bulls and bears).
On the last day of the week, the index dropped to test support from its Jan 16 top but bounced up to close at 7374 - gaining 1.8% on a weekly closing basis.
The formation of a 'doji', followed by a lower close may trigger a pullback towards the top of the 'symmetrical triangle'. The likely dip can be used to buy.
Daily technical indicators are looking overbought and showing negative divergences by failing to touch new highs with the index. Some correction or consolidation is likely.
On longer term weekly chart (not shown), the index has closed at a new lifetime high and is trading well above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators are looking overbought and showing negative divergences.
During the first three trading days of Mar '17, FIIs were net buyers of equity worth Rs 14.5 Billion. For the month of Feb '17, FIIs were net buyers of equity (worth Rs 87 Billion) after four months of net selling.
DIIs were net sellers of equity worth Rs 5.7 Billion during Mar 1-3, '17 as per provisional figures. Sensex and Nifty touched 52 week highs, but closed lower for the week.
Nikkei India Services PMI rose to 50.3 in Feb '17 against 48.7 in Jan '17. That helped the Composite PMI (Manufacturing + Services) to move above 50, indicating growth.
BSE Sensex index chart pattern
A 'shooting star' candlestick pattern, observed in last week's post on the daily bar chart pattern of Sensex, had hinted at a correction/consolidation and a test of support from the blue up trend line.
The index consolidated sideways and touched a 52 week high of 29146 on Mar 2, but closed much lower to form a 'reversal day' bar (higher high, lower close).
On Fri. Mar 3, the index bounced up after testing support from the up trend line but closed about 60 points lower for the week. All three EMAs are rising, and the index closed above them in a bull market.
Daily technical indicators have corrected overbought conditions, but remain in bullish zones. All four are showing negative divergences by failing to touch new highs with the index.
Some more consolidation or correction can be expected before Sensex attempts to cross above its Mar '15 lifetime high.
(The entire trading from Sep '16 onwards has formed a 'cup'-like pattern. Any corrective move that breaches the blue up trend line may form the 'handle' of a 'cup-and-handle' pattern, and drop the index to the 27500-28250 zone.
Should such a pattern get formed - and there are no indications as yet that it will - the subsequent rally can be explosive and propel the index above 32000.)
If you are sitting on gains in small-cap stocks, this can be a good time to book partial profits.
NSE Nifty index chart pattern
The weekly bar chart pattern of Nifty touched a new 52 week high of 8992.50, but closed lower for the week after 5 straight weeks of higher closes.
In the process, it formed a 'reversal week' bar (higher high, lower close) that can trigger some more correction or consolidation.
Weekly technical indicators are looking overbought. RSI and Slow stochastic are showing signs of correcting from their overbought zones.
Nifty's TTM P/E is above the 23 mark - well above its long-term average. The breadth indicator NSE TRIN (not shown) is inside its overbought zone.
The Q3 (Dec '16) GDP figure came as a positive surprise for the stock market, but the veracity of the calculation is under question due to a rather convenient downward adjustment to the Q3 (Dec '15) GDP number.
Despite the improvement in the Manufacturing and Services PMI numbers, the economy is still struggling to recover from the demonetisation shock. The government hasn't helped matters by keeping mum on the extent of 'black money' recovered by the demonetisation process.
Bottomline? Bulls are in control of Sensex and Nifty charts. However, bears might put up a fight before surrendering. Any strong correction - should it come - may be the last opportunity to buy before bulls run away with this market.
The Indian paints industry is dominated by Asian Paints - with more than 50% market share. Akzo Nobel (formerly ICI) India is an 'also ran' with 11% market share - behind Berger Paints (19%) and Kansai Nerolac (15%).
So, what is the investment rationale for this company? It is part of the largest paints and coatings company in the world, and has been gradually rationalising its India operations and slowly gaining market share.
Valuation looks more attractive than its larger competitors. Through organic (greenfield and brownfield) as well as inorganic expansions, the company has been growing at a 20% CAGR over the past 5 years (against an industry average of 12%).
The daily bar chart pattern of Akzo Nobel India had completed a large 'double bottom' reversal pattern around 1200 in Feb '16, and rallied strongly to touch a lifetime high of 1740 on Aug 31 '16.
Note that all four daily technical indicators showed negative divergences (marked by blue arrows) by touching lower tops while the stock touched its lifetime high.
Over the next two months, a 'triple top' reversal pattern was formed. That initiated a correction which was exacerbated be Modi's demonetisation announcement in Nov '16.
The stock price dropped sharply below its three EMAs into bear territory, and touched a low of 1375 on Nov 23 '16. After some sideways consolidation, it dropped even lower to 1328 on Jan 16 '17.
Note that three of the technical indicators - MACD, ROC, RSI - showed positive divergences (marked by blue arrows) by touching higher bottoms while the stock price dropped lower.
That was a trigger for the stock to start its recovery. Resistance from the long-term 'support-resistance' level of 1460 has been overcome. The 'golden cross' of the 50 day EMA above the 200 day EMA will technically confirm a return to a bull market.
The stock may consolidate or correct a little before resuming its up move. The company has a history of strong cash flows and good dividend payments. Patient investors can think about adding it to their portfolios.
For the month of Feb '17, FIIs and DIIs were both net buyers of equity, as per provisional figures. FII net buying crossed Rs 87 Billion; DII net buying was worth Rs 9.3 Billion.
(Those figures were skewed by a single day's buying and selling on Feb 17 '17, when a removal of cap on FII buying in HDFC Bank led to FII net buying of Rs 80 Billion and DII net selling of Rs 56 Billion.)
Q3 (Dec '16) GDP growth was 7% - lower than 7.4% in Q2 (Sep '16), but much higher than the 6.4% figure that economists had predicted due to the after-effects of demonetisation.
The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) rose to 50.7 in Feb '17 from 50.4 in Jan '17. The strong GDP and PMI numbers may put the brakes on any further interest rate cuts by RBI.
The daily bar chart pattern of Nifty rose 0.75% today after two days of correction, and closed at a new lifetime high of 8946. Bulls were active after hearing good news on the GDP and Manufacturing PMI data fronts.
All three EMAs are rising, and the index is trading above them in a bull market. For the past two months, every dip in the index has been used to buy - keeping bears on the back foot.
Daily technical indicators have corrected overbought conditions but remain in bullish zones - leaving the door open for higher levels on the index.
Nifty's TTM P/E has remained above 23 for the past month, which is much higher than the long-term average. The breadth indicator NSE TRIN (not shown) is inside its overbought zone - but some more upside can't be ruled out entirely.
Near a previous top, the outlook should be cautiously optimistic. The time to buy by the truckload passed two months back. Be very selective in your current buying.
