Why the contrarian trade could be betting on the rebound

Free After-Hours Analysis: 

The S&P 500 finished Monday’s session with nice 1% gains after none of the market’s big worries got worse over the weekend.

I was looking for the index to make a move this week, either continuing last week’s bounce or resuming the September selloff. It only took a few minutes on Monday for the price action to tell us investors are still in a buying mood.

I locked in some very nice 3x ETF profits early last week and spent the weekend in the safety of cash because I wasn’t sure what the market wanted to do next. Following Monday’s positive open, I started buying this early strength because that’s what my trading plan told me to do.

I treated this like a new position and stepped into the market with a partial position and a nearby stop. That way if Monday’s early strength proved to be a false bottom, I could get out with minimal damage.

When the index kept acting well through the afternoon, I added more. While not a zero-risk trade yet, trading in partial positions with nearby stops manages my exposure and is a low-risk way to trade.

Nothing really changed since Friday, but that’s the point. 2023 has been the year of “less bad than feared,” and nothing got worse over the weekend, so stocks are rallying in relief. 4,400 still looms large over us, but the longer we hold these levels, the more likely we will continue through them. If we are going to break down, it will happen soon.

Sometimes the contrarian trade is buying high when the crowd thinks prices are too high. We are not in the clear yet, but stay up here for another day or two, and higher it is.

There are risks in buying these levels, and that’s why we are smart about it, but more often than not, high gets even higher. If stocks don’t tumble on Tuesday or Wednesday, that’s where we are headed. Something that refuses to go down will eventually go up.

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