Contrarian Trades - Are you a Leader or Follower?

Price is the function of Supply and Demand. In financial markets, the job of market participants is to debate a story and discover a price of a tradeable asset. In last few years, commodities be it metals or crude have been on dream run, and it seems right now, it is in parabolic bull phase - a phase where maximum appreciation happens in shortest period of time. Generally, this is the phase where even non-believers throw in the towel and sudden demand burst leads to sharp price spikes before the reality kicks in. In overnight trade, crude oil prices closed at $123 per barrel.

But that is not the story. Overnight - a Goldman Sachs analyst said oil could hit $150 to $200 in the next six to 24 months. Did you fell off the chair? Let me guess - I think No, right.

I did a quick scan on what majority of market commentators are saying on the story - It's highly probable. I hardly found any report/commentary where someone disagreed with the forecast. As a matter of fact, most of the commentators gave more reasons of why crude oil will move higher. Hmm....How many people believe the story?

I remember when Goldman Sachs came out with a report on Crude Oil and price target of USD 100 per barrel few years back, the report was a subject of ridicule and most of the people laughed at it. Today, it's a reality. Hmm...How many people believed the story then?

When Sensex was at 10000, some bullish analysts gave a target level of 20000...How many people believed the story?...Very Few

When Sensex was at 20000, the same bullish analysts gave a target level of 27000...How many people believed the story?...Many

Well that's what I call a contrarian trade. When an analyst comes out with an estimate and majority of people accept it as realistic, be rest assured, it's a clear signal that market is about to top out.

Moral of the Story - It is the disbelief that causes a spike in the prices of any asset not the belief and consensus. The most attractive investment opportunities are the ones that sound absurd when you hear it first time. And the most obvious investment opportunities are the most absurd investments one can make.