Check out the top 4 stocks to watch in October 2022
tastytrade logo
uploaded image

May 23, 2017

Analyzing the Contrarian Approach

By:Sage Anderson

After some serious doldrums in terms of market volatility, the financial world was thrown a curve ball in mid-May when global equities turned sharply negative.

Interestingly, the move wasn't related to the recent French elections, which had pushed implied volatility higher (briefly) in early May. Instead, with the S&P 500 closing down more than 40 points, most were pointing to political uncertainty in the United States as the primary culprit.

While one can never be exactly certain what is moving markets, we do know that the VIX spiked in rather dramatic fashion only a day after news circulated regarding President Donald Trump’s decision to fire the Director of the FBI.

We'll have to wait for further developments related to that story, but a recent episode of Market Measures may be of interest in the meantime.

The focus of this particular episode was market strength/weakness, and highlighted tastytrade research examining the performance of a contrarian approach to such signals.

The question at hand was how a trading approach focused on fading market strength or weakness performed as compared to a strategy that followed the market’s prevailing direction.

If the one-day selloff observed in mid-May were to continue, this would be the type of scenario in which a trader might ask him/herself that very same question.

The first research presented on the show focuses on how a contrarian approach of selling the strongest and buying the weakest index ETFs (DIA, QQQ, IWM, SPY) has worked historically.

Using data from 2000, the study isolated the weakest and strongest performer each month of the DIA, QQQ, IWM, and SPY. The study then backtested shorting the prior month's strongest ETF, and buying the prior month's weakest ETF. For each, three trade management filters were applied:

  • manage for a net 1% gain on the position, or held for 2 months

  • manage for a net 2% gain on the position, or held for 2 months

  • held for 2 months

As you can see from the results below, each of the contrarian strategies produced a high success rate with positive gains:

Over the next half of the show, the Market Measures team examined the opposite trade (buying into strength and selling into weakness), in order to provide further context on relative performance of the contrarian approach.

Interestingly, the results showed negative returns for each of the three trade management styles when chasing the market’s prevailing direction.

Given the importance of this topic, and the complexity, we hope you'll take the time to watch the full episode of Market Measures when time allows.

This research could prove even more timely if the current slide in equity prices picks up speed over the coming days and weeks.

We hope you'll reach out at with any comments are questions.

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on 

tastytrade is a trademark/servicemark owned by tastytrade.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).

tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

© copyright 2013 – 2022 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.