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Contrary opinion theory

At times it pays to be contrary. Because this chapter is about not doing what the losers do, which generally is what the majority is doing, this is a good time to introduce the contrary opinion theory. The concept is simple: If all the bulls have already bought, there are no bulls left to buy, and the market falls of its own weight. If a piece of bullish news fails to move the market up, this is your clue. When all the bulls decide to run for the exit door, there will be no cushion of new buyers to soften the decline, and the decline will be particularly severe. The reverse is true if “all the bears” have already sold.

The father of contrary opinion is recognized to be Humphrey Neill, who published The Art of Contrary Thinking in 1954. Neill compiled a bullish consensus that gave a percentage estimate of how many newsletter writers, analysts, and traders were bullish or bearish for a particular commodity. You can try to do this yourself, or subscribe to a commercial service. For example, Consensus Inc. of Kansas City, Missouri, publishes a weekly newspaper with its “Consensus Index of Bullish Market Opinion.” The consensus is expressed as a percent of a market, with 0% indicating no bulls in a market, and 100% no bears. The lower the reading, the more oversold, or bullish (closer to a bottom), the market is. Contrary opinion is not a hard and fast trading system. The way to use it is to watch closely for signs of a turn in the marketplace when the index is high (more than 80%) or low (less than 20%). I am always on alert when a market is very bullish or very bearish, and when everyone knows the story or when the story is on the front page of the commodity section of The Wall Street Journal or the Financial Times, on the evening news, or on the cover of a major news magazine. In the summer of 1993, when the floods hit the Midwest and thousands of acres of good cropland were under water, it seemed everyone was bullish soybeans (including myself). The consensus ratings were more than 90%, Newsweek ran a cover story on the floods. The cover had a picture of a farmer up to his neck in water. Looking back, we now know that issue came out on the very day the contract high for the next decade was reached in the grains.


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