Contra Market

What Is a Contra Market?

A contra market is a portrayal of an asset or investment that moves against the trend of the broad market. Contra (or contrarian) market securities and sectors will more often than not have a negative correlation, or weak correlation, with the broader market index and the overall economy. At the point when the economy is weak or stock market indexes underperform, contra portions outperform, and vice versa.

One advantage of contra markets is that they will generally be undesirable when the broader market is getting along admirably, which might give a few opportunities to value investors to grab up certain arrangements.

Understanding a Contra Market

A contra market stock or sector is one that performs well in bear markets and underperforms in bull markets. For instance, defensive stocks — alleged on account of their relative immunity to economic cycles — like large drugs and utilities, may outperform (however not be guaranteed to rise in value) during bear markets in light of their stable incomes and cash flows. Be that as it may, they may not fare too during bull markets when investors favor more dangerous stocks and sectors like technology and fundamental materials.

"Safe haven" securities like U.S. Treasuries and gold, which have the best appeal during economic strife, are likewise classic instances of contra market plays.

Contra Market Strategies

Contra market strategies are employed for various reasons. Potentially an investor accepts the broader market will decline, thus they wish to gain some protection, or perhaps profit, by moving some or every one of their funds into contra markets. Or on the other hand perhaps the investor is a contrarian, meaning they like to buy or sell assets that run contrary to current trend of the broader market or economy. The investor may likewise basically need to diversify and not hold just assets that will quite often move in a similar bearing.

• Hedging: Investors can utilize simple contra market strategies to hedge their portfolios. For instance, assuming an investor's portfolio has critical exposure to equities, they could purchase an asset class that is commonly seen as a safe haven, like gold, to safeguard against a serious stock market downturn. Investors can purchase physical gold from government mints, precious metal dealers, and diamond setters, or through futures contracts on a commodities exchange. Buying a gold exchange-traded fund (ETF) like the SPDR Gold Trust Shares (GLD) is another way that investors can gain exposure to the commodity.
• Contrarian Investing: Using contra market strategies can assist contrarian investors with profitting against the crowd. Some fund managers accept that taking a long position in an aging bull market is the "crowded trade," meaning there is no place for new money to push the market higher. Rather than taking the conspicuous trade, the contrarian investor might search for investment opportunities that outperform assuming the broader stock market begins to fall, for example, purchasing an ETF that returns the inverse performance of the Standard and Poor's 500 (S&P 500) index. There are numerous inverse ETFs that rise in price when the underlying asset falls in value.
• Diversification: Using contra markets can assist an investor with enhancing. Holding just stocks that move in a similar heading might function admirably when the stock market is rising, however when it falls so will every one of the holdings in the portfolio. Adding a few stocks or different assets that have a low correlation, or negative correlation, to the stock market might assist with leveling out a portion of the promising and less promising times in the portfolio's returns.

Advantages of Investing in Contra Market Sectors

During bull markets, cyclical sectors like technology and financials perform well and get more costly in terms of price, while contra market sectors, for example, consumer staples and utilities underperform. This furnishes investors with an opportunity to accumulate contra market stocks at lower prices and more alluring valuations.

For instance, as the U.S. economy performed well in the primary half of 2018, technology FANG stocks outperformed the broader market. Thus, utility stocks were undesirable and accordingly less expensive. This might have drawn in some contra investors to begin accumulating positions in these underperformers in the expectations that they will perform better from here on out.

Disadvantages of Investing in Contra Markets

While contra markets give a possibly safer or more profitable place to be the point at which the broader market or economy changes heading, holding contra assets during a major bull market could mean missing out on big returns from the broader market.

More than a long term period between May 2014 and 2019, the SPDR S&P 500 (SPY) returned more than half while the SPDR Gold Trust Shares (GLD) returned - 3%. Partaking in the major bull market in stocks was a more prudent play than trusting gold would track down its balance.

Illustration of a Contra Market: Gold

Gold has a weak correlation with the S&P 500 stock index. Now and again the correlation is negative, different times it is positive, and will in general oscillate this way and that. Numerous investors like to hold gold as it is seen as an outperformer during difficult stretches for the stock market. Yet that isn't generally the case.

At the point when the S&P 500 rose from 1995 to 2000, the price of gold declined and had a negative correlation. The S&P 500 then tumbled from 2001 into late 2002. Gold began rising while stocks were falling, trading relatively flat and afterward picking up steam to the upside in mid-2001. So in this case, switching to gold would have paid off.

The chart below shows the SPDR S&P 500 ETF versus gold futures (blue line), with the base indicator showing the correlation between the two assets.

From mid 2003 to mid-2007 stocks and gold both rose. Stocks flattened out for a large portion of 2007 while gold rose. For this period, gold was good as stocks were topping. Stocks and gold both sank in 2008, yet gold turned higher sooner than stocks and ran to the upside into the 2011 high.

The S&P lined in mid 2009 and kept on rising into 2019, with several corrections. Gold crested somewhere in the range of 2011 and 2012, and afterward went into a downtrend in 2013. Somewhere in the range of 2014 and 2018 gold moved sideways, and didn't give a safe haven during the 2015 stock market correction as gold likewise fell during that time. In 2018, while stocks encountered a correction, gold likewise fell, in spite of the fact that it encountered a small rally prior to the stock market base.

Highlights

• Investing in contra markets during a broad market rally could mean missing out on returns during a bull run.
• Investors use contra markets to hedge, make contrarian investment plays, or enhance holdings.
• A contra market is one that maneuvers against the trend of the broader market and will in general have a negative correlation with it or if nothing else a relatively weak correlation.