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Contrarian Investing: A Tempting Opportunity in the Market


Of all Warren Buffett’s famous advice, one quote stands out: “be fearful when others are greedy, and greedy when others are fearful.” As investors, we often seek opportunities to apply this wisdom to our strategies. Currently, amidst the market’s recent jitters, there is even more motivation to consider buying into stocks.

August has historically been a challenging month for investors. Although stocks did recover from their mid-month lows, all three major indexes – the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite – ended August 2023 in the red. As we embark on a fresh month, it is crucial to acknowledge that historical trends indicate an additional reason to proceed with caution in September.

For contrarian investors, this may be an enticing moment to step off the sidelines and embrace the market. However, if you require more persuasion, BofA Securities’ latest Wall Street poll offers additional evidence.

Savita Subramanian, the head of BofA’s U.S. equity and quantitative strategy, recently highlighted an intriguing finding from the firm’s Sell Side Indicator. Although unchanged for August, this indicator remains a buy signal for stocks.

In conclusion, as professional investors, it is imperative to consider Warren Buffett’s timeless advice. The current market conditions provide a unique opportunity for contrarians willing to act when others hesitate. Furthermore, BofA Securities’ latest findings add further weight to this encouraging outlook.

Wall Street Strategists Remain Bearish Despite Small Uptick

The Wall Street Strategist Sentiment Indicator (SSI) has historically been a reliable contrarian indicator, says Subramanian. It has proven to be a bullish signal when Wall Street strategists were extremely bearish, and vice versa.

Last month, the allocation of equities remained steady at 53.5%. This is 93 basis points higher than its bearish low of 52.5% in May, which was the lowest level in over six years. However, despite the small uptick, the SSI is still more bearish than bullish, as it remains below the 15-year average of 54.7%.

According to Subramanian, the current level of the SSI indicates a potential price return of +15% over the next 12 months. This means that the S&P 500 could reach 4700 by the end of the year or 5200 in 12 months. Historical data shows that when the indicator has been at this level or lower, 12-month forward S&P 500 returns were positive 95% of the time, compared to an overall positive return of 81%. The median 12-month return during these periods was 21%.

In terms of specific stocks, Subramanian highlighted the consumer discretionary sector as a potential outperformer. This sector could thrive if the U.S. manages to avoid a recession and consumer demand remains strong.

As a new month begins, investors seem to be cautiously optimistic. Both the Dow and the S&P 500 are currently in positive territory as of early Friday afternoon. Let’s hope September brings positive momentum throughout the month.

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