Short QQQ, Long TLT

The crowd is right during the trend but wrong at both ends – Humphrey Neill, The Art of Contrary Thinking

Contrarian investing is widely misunderstood. Most of the time it pays to invest with the trend and the crowd. It’s only at inflection points, when trends come to an end and the crowd is caught off guard, that contrarian investing works. Timing those inflection points is very difficult but I think we may be at one right now.

Apple (AAPL) – the biggest and most important stock in the market – reported earnings earlier this afternoon. Revenue was down marginally (-0.7%) year over year with only the iPhone and Services segment showing growth. As I wrote in the weekly preview last Friday and again Wednesday morning, AAPL is now a value stock with no growth that is still being priced like a growth stock and is overdue to be repriced accordingly. The lack of growth this quarter bears that out once again. AAPL shares are currently -3% in the after hours.

The crowd has been hiding out in Big Tech for a long time – and that has worked this year as well as those stocks have performed marvelously and held up the entire market, disguising enormous internal weakness beneath the surface (“The Market Is About To Break”, October 3). With AAPL’s report today showing once again that Big Tech is mature and doesn’t have much growth (“Apple Zero And The Maturation Of Big Tech”, August 5), Big Tech may be about to come back to earth, taking the major, market cap weighted indexes with it. I think it’s time to go contrarian and short QQQ.

In the other important event of the week, the market called Powell’s bluff that the Fed may hike one more time in December and continues to lean hawkish, pushing down yields hard Wednesday and Thursday. In other words, the market is – correctly IMO – pricing in the end of the Fed’s rate hiking campaign. Barron’s said last weekend on its cover that it was time to buy bonds which everyone then interpreted to mean that it still isn’t. But I thought that it was and the price action the last two days confirms my conviction. Which means that the other contrarian play in addition to shorting QQQ is long TLT.

Contrarian is usually wrong but every once in a while the stars line up and you can make a lot of money doing the opposite of what everyone else is.