2 contrarian trades that will make you uncomfortable

Do you really want to be a contrarian investor? Most of the time, being contrarian means that your investment views are far from the crowd, and you will feel very isolated and uncomfortable.

With that preface in mind, I offer two uncomfortable contrarian trades, based purely on technical analysis.
 

Fading a NAFTA breakdown

Let’s start with the latest developments in Trump’s trade policy of imposing aluminum and steel tariffs on major allies. Canada’s prime minister Justin Trudeau responded in a Meet the Press interview by characterizing the tariffs, which were imposed on national security grounds, as “frankly insulting”.

The idea that the Canadian steel that’s in military, military vehicles in the United States, the Canadian aluminum that makes your, your fighter jets is somehow now a threat? Our soldiers who had fought and died together on the beaches of World War II… and the mountains of Afghanistan, and have stood shoulder to shoulder in some of the most difficult places in the world, that are always there for each other, somehow — this is insulting to them.

The reaction isn’t just restricted to Canada. The latest G7 communique of finance ministers and central bankers was, well, more like a communique from the G6 plus one.

Addressing Global Risks and Promoting a More Level International Playing Field
Ministers and Governors had a frank exchange on the benefits of an open rules-based trading system and many highlighted the negative impact of unilateral trade actions by the United States. Ministers and Governors agreed that this discussion should continue at the Leaders’ Summit in Charlevoix, where decisive action is needed. The aim of this should be to restore collaborative partnerships to promote free, fair, predictable and mutually beneficial trade.

Trump hit back with this latest tweet.
 

 

How would you feel about fading trade fears, starting with the fears of a NAFTA breakdown?

From a technical perspective, the Canada-US market equity pair (note both ETFs are in USD, which accounts for currency effects), appears to be washed out and Canadian stocks are starting to turn up. In addition, the Canadian Dollar (CAD) is holding a technical support level against the USD.
 

 

By contrast, Mexican stocks are in a long term relative downtrend against US stocks. However, the Mexican Peso (MXN) is also holding a key support level.
 

 

An analysis of Mexican against Canadian stocks show that Mexican stocks are trading at a key relative support level. The MXNCAD cross rate is also testing technical support, which seems to be holding. Here is another uncomfortable thought. If Mexico is poised to outperform Canada, and Canada is poised to outperform the US, would you buy Mexico and short the US?
 

 

While jitters over a NAFTA breakup are high, technical conditions suggest that fears are overblown and conditions are ripe for a rebound in the relative performance of Canadian and Mexican stocks.
 

Value vs. Growth

For my second uncomfortable trade, I offer the original contrarian trade of value stocks. Value stocks have been underperforming growth stocks for about a decade. I am indebted to my former Merrill Lynch colleague Fred Meissner of the FRED Report for the following observation.

The historical evidence has shown that the small cap value/growth cycle turns up ahead of large cap growth/value. As the chart below shows, small cap value may be tracing out a bottom against small cap growth. The small cap value/growth ratio is exhibiting a positive RSI divergence that has also been a characteristic of past bottoms.
 

 

Will history repeat itself?

Are these trades sufficiently uncomfortable for you? Do you really have what it takes to be a contrarian investor?