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The Ultimate Contrarian Trade

By Jeff Clark
Thursday, 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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Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%