A little over a week ago, I got a warning from contrarian investor Matt Gohd. The market was in "melt-up mode" thanks to confidence that Mitt Romney would beat Barack Obama and hopes for a solution to the euro mess.
“With VOL close to a three-month low, the better risk return bet is to the downside with a shot to test the Thanksgiving low,” he warned.
And, of course, he was dead on. The markets rolled downhill into this week and keep heading downward.
“So the question is, what is the next thing that will screw everyone? I’m leaning toward a rally,” said Gohd, senior managing director at Revere Securities.
Keep in mind that Gohd is a contrarian trader who often takes positions that other investors and analysts would reject.
Gohd thinks that a lot of the positive illusions that propped up the market have gone away, which leaves room for upside if there is good news.
Here’s his list of dispelled illusions:
A. We went from Romney as the presumptive nominee to Romney who?
B. We went from jubilation over the euro mess being solved to everyone talking in despair over the coming recession in Europe.
C. Retailers keep blowing it. Best Buy . Lululemon. The hope for a recovery in retail is gone.
D. The China story is now getting so much attention that it has probably run its course in the markets. That’s one’s done, for now.
“So here’s kind of what I'm thinking. Start setting up for another rally. Trade small. Moves are so big, so you don't need to have a big position to make money,” Gohd says.
One bright spot he sees is that financials stocks are acting better than the market. When that happens, it's positive, according to Gohd.
This runs directly contrary to bank analyst Dick Bove’s note yesterday, which argued that bank earnings look bleak.
When I asked him for one stock that he thinks is worth it right now, Gohd mentions the stock everyone loves to hate: Research In Motion .
“RIMM has been sold down. With earnings tomorrow, there’s a chance to make money,” Gohd says.
He prefers structuring a protected long position with options that flat-out buy the stock.
Keep in mind that Gohd is a trader and may or may not hold positions in all of the investments he mentions.
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