Sunday thoughts on manipulation and about being a true contrarian

Time again for some Sunday musing on those things that daze and amaze, on the games that astound and confound retail investors trying to make sense of the capital markets.  

Manipulation, everyone loves to scream manipulation.  

You see people posting about it all the time on stock message boards and other social media sites devoted to the discussion of the equity markets.  Are the markets manipulated?  In my opinion its a dumb question, of course they are.  

What's interesting is that you never see people posting messages complaining about manipulation when a stock's value is going up.  No, to most people manipulation only comes into play when they think its being employed to work a stock down.  Well, here's a news flash...it works both ways.

There are market forces at work way beyond the scope of retail investors.  Hedge funds with billions of dollars in capital that play both sides, long and short.  And Hedgies have another advantage over Mutual Funds, and that is margin or leverage.  Hedge Funds can and will use leverage, as much as 100%, to increase their fire power.  

When you consider all the tools available to influence the buying and selling decisions of retail investors its pretty easy to understand why the bleacher crowd ends up on the wrong side so often. Going long when the smart play is to go short, and short when the smart money players with their giant tool box go long.

Television, print media, analyst ratings and recommendations, investor news letters, promotional interviews and stock promoters with podcasts and YouTube videos, email blasting chop shops.  

I've posted this old webcast interview of Jim Cramer before, but its something that's worth repeating. 

Cramer basically says that fundamentals are meaningless, and I happen to agree.  When you have Hedge Fund players with hundreds of millions of dollars at their disposal they can create whatever reality they want, and I would argue that the more speculative the company the easier it is to do.

So what is a small little retail investor to do?  Incidentally, I don't care how much money a retail player has to work with, even if its one million or even ten million, we're all small fish swimming in shark infested waters.  Some of us may be little tiny guppies, while others may be big fat tuna fish. But we're all luncheon meat when there are killer whales in the water.

There's only one thing to do in my opinion, and that is to be a contrarian.    

But what is a contrarian anyway?  It seems that everyone these days is a contrarian, or at least they claim to be.  If everyone is a contrarian then the real contrarians would have to be conformists wouldn't they?  So let's define what a true contrarian is.

Basically a contrarian tries to run in the opposite direction of the retail herd.  When all the sheep are bullish and buying the contrarian either stays away and goes short.  When the great unwashed are being told to stay away, that an investment is no good, then the true contrarian looks to go long.

BUT WAIT A MINUTE, NOTHING IS THAT SIMPLE.

When looking to go long it would be disaster to simply throw money indiscriminately at every distressed stock one comes across.  Companies do go bankrupt and stocks do get delisted.  

From where I sit its a question of extremes, and in my view charting or technical analysis is absolutely essential.  I myself will not buy any stock without first consulting the chart.  

So what do I mean when I say its a question of extremes?  That's where charting comes in.  If a company releases negative news, if there are posters to social media sites preaching doom and gloom and doing all they can to counter any bullish argument, then a true contrarian might have something worth risking some money on.  The biggest qualifier is the chart, specifically the price volume movements.  If the retail herd is being told to stay away, but the chart shows evidence of support, that's a time when I will start to do more research.

Sometimes a stock is falling, and yet there is bullish news out and pumpers all over social media imploring investors to "get in on the cheap shares".  I would be careful in that case, while the retail herd is being encouraged to buy, there are obviously others unloading the shares the sheep are getting.  

A contrarian looks for support when the players are being encouraged to sell, or for weakness when the herd is being told to buy.

I don't discriminate between penny stocks and those listed on more senior exchanges, its all the same game as far as I'm concerned.  And stocks don't turn from a buy to a sell in the blink of an eye.  I have a habit of getting out too soon when I see market forces ringing the dinner bell, but that's okay....when I leave money on the table I simply cry into the money I made.

Good luck and happy Sunday everyone