The return since opening the latest contrarian trading portfolio on Sept. 25 is now a modest 0.9%, with the big gains being made in iShares Silver Trust ( SLV)), and in trades between the leveraged oil and gas exchange-traded funds of Ultralong Oil & Gas ProShares ( DIG) and Ultrashort Oil & Gas ProShares ( DUG).

Six of the portfolio positions are currently closed and four are still open. Two of the closed positions will be reopened on Monday.

To see the third update in mid-November of the contrarian trading portfolio click here.

Idea No. 1 -- Buy Natural Gas

This position was closed on Oct. 30, with a loss of 11.6%, until it was reopened with a buy at $9.10 on Nov. 12. Currently, the position is still open with a gain of 8%.

Idea No. 2 -- Buy North American Energy Production; and Idea No. 4 -- Buy Corporate Bonds; have been closed previously and will remain closed. Idea No. 3 - Buy Silver

The position in silver was established to try to take advantage of the ratio of the price of silver to that of gold, which is below historic averages. Gold has actually done better than silver since late September ( SPDR Gold Shares ( GLD) is up 18.6%, while silver is up 13.6%). I have decided to make a reflexive move on this position -- potentially the most dangerous kind of move --and sell SLV on Monday and buy Ultrashort Gold ProShares ( GLL).

In the GLD chart that follows, it can be seen that all the customary technical indicators are supportive: moving average convergence/divergence, relative strength index, price trends and moving averages are all trending up. The price chart has been in the upper half of the Bollinger band for three months. The only negative feature in the chart is the size of the price drop on Friday. The two previous drops of a similar size in the past three months didn't result in a price reversal. Will the third time be different? Making this move now is a reflexive bet that this time will be different.

Idea No. 5 -- Short Financials

The first attempt to go short financial stocks produced a loss of 9%. The second attempt lasted only two days and lost 1.7%. It's tough being a contrarian in a trending market. Nonetheless, a third try with Ultrashort Financials ProShares ( SKF) will be opened on Monday. The following chart shows the key factors in this decision.

The factors that have prompted buying SKF at this point:
  • 1. MACD has been rising since September.
  • 2. RSI has been rising since mid-October.
  • 3. A rounded bottom pattern has been defined over the past three months (black curve).
  • 4. A gap down in early November was filled on Friday, Nov. 27.
  • 5. The Friday gap up could be a breakout above the 50-day moving average. The last attempt to do this at the end of October failed.

Idea No. 6 -- Sell Municipals

This position keeps chugging along; it has now gained 1.8%. This is comprised of $2.49 from the price decline, adjusted for 62 cents in dividends that were paid while we have been short.

Idea No. 7 -- Sell the S&P 500

This position has been closed since Oct. 12. It will be reopened, buying Ultrashort S&P 500 ProShares ( SDS), on Monday. The following chart shows the key factors in this decision.

The factors that have prompted a short at this point:
  • 1. Volume has declined throughout the rally since Nov. 1.
  • 2. The MACD peaks have been successively lower since late September.
  • 3. MACD (black) is crossing the moving average (red).
  • 4. The RSI has been in a down trend during what has turned out to look like a two week top.
  • 5. The apparent top on November has been much broader than the three preceding tops. This presents a dichotomy: it could be interpreted as a consolidation or as an exhaustion pattern.

Idea No. 8 -- Sell Oil

The original position in DUG has been reversed twice to DIG, which has been the holding since Nov. 9. The overall gain since Sept. 25 is 5.4%, with two losing trades and two with gains. We will continue to follow the strategy of buying the reversal position whenever stopped out.

The summary of the fall contrarian trading portfolio to date is shown in the following table.

The next report, a closeout of the fall portfolio, will be published on Dec. 14.

-- Written by John Lounsbury in Clayton, N.C.

At the time of publication, Lounsbury was long SKF, UNG, SDS and GLL.

John B. Lounsbury is a financial planner and investment adviser, providing comprehensive financial planning and investment advisory services to a select group of families on a fee-only basis. He worked for 34 years with IBM, and spent 25 years in R&D management and corporate staff positions. He also was a Series 6, 7, 63 licensed representative with a major insurance company brokerage for nine years.

Specific interests include political and economic history and investment strategy analysis. He holds degrees from the University of Vermont, Columbia University and the Illinois Institute of Technology, where he studied chemistry, physics and mathematics. He is a contributor to Seeking Alpha and his own blog, PiedmontHudson.

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