In trading you generally hear that to make money you have to be a contrarian. This is a half-truth. You need to be an independent thinker. You shouldn’t be a contrarian just for the sake of it.

There’s a famous saying “60 million Frenchmen can’t be wrong”. This is based on the idea that the crowd is collectively smarter than any one individual. Therefore, you can follow the herd (the trend) as long as there are reasons to do so, but you need to look out for signals that can change the picture and reverse the trend. That’s the contrarian part.

Soros once said that he was considered a contrarian. He added though that he was very cautious about going against the herd and most of the time he followed the trend. All the time, he was aware of being part of the herd and he was always on the lookout for inflection points.

When the reasons to follow the trend start to weaken and you begin to see signs of a change, that’s when you can build a contrarian thesis. Your thesis might not come to fruition though without a catalyst. You generally need something to trigger your view and get the market to follow it.

The markets can overextend beyond the fundamentals which is why Keynes once said that the market can remain irrational longer than you can stay solvent.

EXAMPLES OF CONTRARIAN THESES AND CATALYSTS

The most recent example is the dovish Fed pivot in December 2023. The market at one point expected seven rate cuts in 2024. The contrarian view was that the Fed’s pivot would reignite animal spirits and lead to a pickup in economic activity, a reacceleration in inflation and less rate cuts than the market expected.

Bonds kept on rallying after the Fed’s pivot because that was the trend and there were no signs yet that the contrarian view would come true. In Q1 2024 though, the US data started to surprise to the upside and made the market to price out the rate cuts. The data was the catalyst that led to a repricing in interest rates expectations and to the change in the trend.

Once you build your contrarian thesis the tricky part is identifying the right catalysts. They are not based on just economic data. For example, the US Dollar bottomed in January 2021 after the Democrats won the majority in the Senate in the elections in Georgia.

From there the market expected more fiscal stimulus from the Democrats and coupled with supply chain issues and the already huge monetary stimulus by the Fed, it led the market to start worrying about inflation and an earlier Fed pivot. This Fed pivot came in June 2021 with a hawkish meeting that gave the US Dollar the ultimate tailwind to start its massive appreciation.