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Market Overview

Market Teeming With Contrarian Opportunities

For traders who are willing to take on substantial risk in order to score a huge payday, the recent volatility in financial markets along with whipsawing sentiment has provided a myriad of opportunities to take contrarian positions with huge upside. Let's start with the most obvious.

Financials - This trade has wrought pain on Wall Street in 2011. A number of very large, very successful, hedge funds have been crushed in this trade, such as David Tepper's Appaloosa Management and John Paulson's Paulson & Co. Their pain could be your gain. These two prominent managers have taken big stakes in stocks such as Bank of America (NYSE: BAC) and Citigroup (NYSE: C), only to see those bets go sour in 2011. If their thesis, however, ends up being accurate, contrarian investors getting in at today's levels should clean up. Tepper for example gave a presentation on BAC in 2010 where he said he thinks it is going to be a $27 stock. The shares are currently going for $10.92. No one wants these names - a lot of times that is a great buy signal.

Housing - At this point, it looks like the housing market is never going to bottom. Do you know what that means? Cheap stock. If you are optimistic on housing and willing to put your money where your mouth is, check out the SPDR S&P Homebuilders ETF (NYSE: XHB) and individual names such as Toll Brothers (NYSE: TOL), Beazer Homes (NYSE: BZH) and KB Home (NYSE: KBH). They could always go lower, but you can be sure you aren't following the herd with these stocks - and that is frequently a comforting thing.

Crude Oil - The recent sell off in commodities has opened up the space for contrarians who want to bet against the crowd and are looking for much higher prices. The crude trade has really quieted down in the last month or so, and a bet that prices are going to skyrocket again should put you firmly in the minority. Look to buy out of the money call options on crude futures or on the United States Oil Fund ETF (NYSE: USO). Just a couple of months ago, it looked like $120 NYMEX crude was a likelihood - now many think it is highly unlikely. If you bet against them - and are right - the payday will be huge.

Silver - Sticking with the commodities theme, a bet on a return to $40+ silver by the fall might make sense. This market got absolutely crazy in April with silver nearly breaking $50. While prices have stabilized, and many traders remain long-term bullish, not many market participants are looking for a near-term test of those levels again - but it could happen. A bet that the U.S. economy stumbles this summer and the Fed enacts more QE in the fall could be expressed by buying out of the money call options on COMEX silver futures or the iShares Silver Trust ETF (NYSE: SLV).

Grains - Check out the recent action in the corn and wheat futures markets. Both are trading limit down on Thursday with corn notching a 4.61% loss and wheat down almost 9%. This might be the perfect time to step in and buy when there is blood in the streets. Remember, if you are a buyer at these levels, you are doing business with weak hands as the longs in corn and wheat are now completely battered and bruised and staggering to the sidelines after today's washout. Many are forced sellers. Getting long here allows you to operate from a position of strength, whereas many of the sellers have been cleaned out and are getting hit with margin calls. A number of leading fertilizer names are also getting killed. Consider buying calls options on stocks like CF Industries (NYSE: CF), Potash (NYSE: POT) and Mosaic (NYSE: MOS).

Indices - The crazy rally that we have had this week along with a whipsaw in sentiment from very bearish to very bullish has set up a nice opportunity for bears to position for a sharp move lower in the indices in the coming weeks. You pick em, and it has been up over the last 4 days. Consider betting against the Russell 2000 using options on the iShares Russell 2000 Index ETF (NYSE: IWM) or options on Russell 2000 futures. Also, consider buying put options on the SPDR S&P 500 ETF (NSYE:SPY) or the PowerShares QQQ Trust ETF (NASDAQ: QQQ) or placing bearish bets on S&P 500 or Nasdaq 100 futures. Remember, the market had been falling for around 70 days prior to this week's rally which may have been partially inspired by fund managers pushing up stocks in order to make their Q2 performance look better. We could easily give back the gains in short order.

Posted-In: Bonds Long Ideas Short Ideas Futures Technicals Options Economics Markets Trading Ideas


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