Schaeffer's Daily Contrarian

"When everyone thinks alike, everyone is likely to be wrong."
~ Humphrey Neill, The Art of Contrary Thinking

The above quote has been reiterated numerous times in our publications because of its ability to succinctly capture the essence of contrarian thinking. While simple in theory, the task of capturing the prevailing sentiment can be as elusive as defining the boundaries of a cloud. The closer you get to it, the harder it is to see.(More)

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Is Cott a Good Buy?

Posted on 9/3/2010 8:27 AM

Publication: "Barron’s"
Publication title: "A Beverage Stock at a Sweet Price "
Publication Date: 9/1/2010

KeyWords: COT 

Brief Summary:

This Barron's article takes a closer look at private-label soda producer Cott Corp. (COT). The article opines that the security is relatively cheap right now. The stock is at a bargain multiple of 7.5 times earnings-per-share estimates for 2011, which is below analysts' forecast for an annual earnings growth rate of 8%. Furthermore, with consumers still cautious about their wallets, the stock could be attractive as a play on a potential double-dip recession.

Cott has also diversified recently with the acquisition of private-label juice maker Cliffstar. The move gives Cott a little more muscle with retailers looking to fill their shelves with value-laden store brands.

Stifel Nicolaus recently turned positive on Cott shares, noting the Cliffstar deal and the fact that the major brands in the sector have eased off their summer promotions. "Cott is effectively a new small cap name with the purchase of Cliffstar," Stifel analyst Mark Swartzberg wrote in a note to clients last month. "In this context, we consider one, two, or three quarters of [new company] results likely catalysts to an improved market view of value."


Contrarian Takeaway:

Sentiment is currently mixed toward the shares. According to Zacks, all five of the analysts following the security rate it a "strong buy."

However, short sellers are loading up on bearish bets. During the past month, the number of COT shares sold short increased by nearly 11% to 2.6 million. This accumulation of bearish bets accounts for almost 4% of the company's float. A continuation of this trend toward short selling could spark added downward pressure on the security.

Technically speaking, the shares of COT are down more than 13% since the beginning of the year. The stock has recently stair-stepped lower from its October peak above 9, creating a series of lower highs and lower lows. Furthermore, the equity is encountering resistance at its 10-month moving average. Considering the security's lackluster technical performance, COT could be vulnerable to downgrades or bears adding to their short positions, resulting in a fresh wave of selling pressure.

Jocelynn Drake (jdrake@sir-inc.com)


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Can Amazon.com Really Compete With Netflix, Inc.?

Posted on 9/2/2010 2:30 PM

Publication: "Reuters"
Publication title: "Amazon eyes subscription Web TV service"
Publication Date: 9/2/2010

KeyWords: AMZN  

Brief Summary:

This article reveals that online retailer Amazon.com, Inc. (AMZN) may be in the midst of developing its own subscription TV service -- you know, what Netflix, Inc. (NFLX) does. While AMZN's site already has a video-on-demand section, the company is hoping to expand its online content to include video streaming as well.

While the article notes that this idea is still in the works -- with the company currently in the midst of sending out proposals to various media companies -- it also suggests that the online media business is becoming inundated, despite the fact that studios are somewhat unwilling to release newer content for online distribution. This could bode ill for AMZN down the line, as it tries to compete in a highly competitive industry.


Contrarian Takeaway:

AMZN is already fighting an uphill battle with Apple Inc. (AAPL) over e-readers, and now it's trying to compete with NFLX, the king of online media rentals. Meanwhile, the stock's technical performance of late leaves much to be desired. After peaking above $150 in April, the stock has since backpedaled to around $134, and is currently facing overhead resistance from the $135 level.

Reinforcing AMZN's current technical situation is peak call open interest of roughly 7,000 contracts at the September 145 strike, with another 10,500 calls in combined open interest at the September 134 and 140 strikes. Going forward, this hefty accumulation of call open interest could exert additional pressure on AMZN.

Meanwhile, the International Securities Exchange (ISE) reports that 1.12 calls have been bought to open for every put during the past two weeks. This ratio ranks in the upper half of its annual range, pointing to an increased appetite for bullish bets on AMZN lately.

Given the stock's technical and fundamental troubles lately, maybe AMZN should consider getting back to what made it popular in the first place: books -- hard-cover books. By trying to compete in other industries -- with sector giants, no less -- AMZN may be stretching itself too thin.

Sarah Wasserman (swasserman@sir-inc.com)


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Sizing Up the Post-Earnings Prospects for Dollar General

Posted on 9/1/2010 2:39 PM

Publication: "Barron's"
Publication title: "Dubious Value at Dollar General "
Publication Date: 8/31/2010

KeyWords: DG 

Brief Summary:

This article takes a skeptical look at Dollar General (DG) following the deep-discount retailer's latest turn in the earnings confessional. Although the company's second-quarter results were "generally good," and the author believes that "economic uncertainty still favors dollar stores," there are a few points of concern with DG in particular.

For starters, DG trades at a higher multiple than sector peer Dollar Tree (DLTR) -- and carries a heavier debt load, to boot. Plus, the author notes that DG's customer base is lower-income than some of its rivals, which places the retail chain at relatively greater risk in the event of continued economic stagnation. Overall, the article concludes that bargain-hunting investors may find more value elsewhere in the deep-discount retail sector.


Contrarian Takeaway:

DG is having a tough time on the charts lately, too. The stock has pulled back since peaking near $31.50 in early June -- and as a result, DG's 10-week and 20-week moving averages recently completed a bearish cross. The stock also tumbled through support at its 120-day moving average earlier this week, and this former technical floor could now switch roles to act as resistance.

Short sellers have been quick to try and capitalize on this technical weakness, with short interest rising by 35.6% during the most recent reporting period. These bearish bets now account for nearly 3% of DG's float, and a continuation of this shorting activity could act as a headwind for the shares going forward.

However, traders should keep an eye on the stock's progress near $26.50 before pulling the trigger on a bearish position. This region has acted as reliable support for DG, and it's now home to the equity's fledgling 10-month moving average. Unless the shares stage a decisive breach of this area, it's entirely possible that DG's recent weakness is nothing more than a short-term pullback.

Elizabeth Harrow (eharrow@sir-inc.com)


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Expectations Remain Mild as Motorola, Inc. Attempts to Reclaim Chinese Market Share

Posted on 8/31/2010 11:41 AM

Publication: "Wall Street Journal "
Publication title: "Motorola Makes China Push"
Publication Date: 8/31/2010

KeyWords: MOT GOOG AAPL 

Brief Summary:

This Wall Street Journal article highlights Motorola, Inc.'s (MOT) recent push to reclaim mobile-phone market share in China – the world's largest mobile market by number of subscribers – where it was once the market leader. According to research firm IDC, Motorola's market share in China stood at a mere 2% in the second quarter, marking a 23% decline from the same quarter of 2006.

The firm recently released a third generation of its Ming handsets, which run on Google Inc.'s (GOOG) Android operating system and are "designed for Chinese users who prefer to input Chinese characters using a stylus on a touch screen." Including the new Ming cell phones, Motorola has launched 11 smartphones in China since December, and Frank Meng, president of Greater China for Motorola's mobile-devices business, estimated that more than half of Android-based phones shipped in China during the first six months of 2010 had the Motorola stamp.

However, the article notes that competition is growing increasingly stiff in China, with IDC predicting a 50% year-over-year jump in smartphone sales in 2010. One of Motorola's main competitors is Apple Inc. (AAPL), which has said it plans to open 25 stores in China by the end of 2011. In addition, Apple partner China Unicom (CHU) has said it hopes to launch the iPhone 4 in China by the end of this year, while Taiwanese handset hotshot HTC is expected to debut four handsets – including three Android phones – this fall, according to the column.


Contrarian Takeaway:

Unlike AAPL -- which has earned a whopping 52 "buy" or better analyst endorsements with not a "sell" rating in sight -- the expectations surrounding MOT are relatively low. According to Zacks, the stock harbors 13 "buy" or better ratings, compared to 15 "hold" or worse recommendations. Plus, Thomson Reuters pegs the average 12-month price target on MOT at only $8.88 – a premium of just 17% to the stock's intraday high of $7.60.

In that same vein, the short-term options crowd is also skeptically skewed toward the stock. The equity's Schaeffer's put/call open interest ratio (SOIR) of 0.82 ranks in the 77th annual percentile, implying that near-term traders have been more bearishly biased toward MOT only 23% of the time during the past year.

Technically speaking, the shares of MOT don't look half bad, either. The stock has outperformed the broader S&P 500 Index (SPX) by almost 15% during the past 60 sessions, with the security sitting comfortably atop its 60-week moving average, which has acted as support since mid-July.

Should Motorola's push to reclaim China prove more fruitful than anticipated, the Street's low expectations for the stock present a potential contrarian opportunity. A round of upgrades and/or price-target boosts, or an unwinding of pessimism in the options pits, could help to put the shares in the black for 2010.

Andrea Kramer (akramer@sir-inc.com)


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Will Salesforce.com's Social Media App Bring Bears on Board?

Posted on 8/30/2010 2:38 PM

Publication: "Bloomberg Businessweek"
Publication title: "Salesforce.com Channels Facebook"
Publication Date: 8/26/2010

KeyWords: CRM 

Brief Summary:

Has Salesforce.com Inc. (CRM) placed itself in the same league as social networking giants Facebook and Twitter? Bloomberg Businessweek certainly thinks so after checking out CRM's new social media application, "Chatter." According to the company, Chatter is a "real-time collaboration cloud." Or, as the author puts it, "Instead of asking 'What's on your mind?' or 'What's happening?' Chatter poses the question: 'What are you working on?'"

Bloomberg Businessweek also reports that since Chatter began rolling out in June, about 20,000 companies are now using the service, including Dell Inc. (DELL). The service is free for subscription customers, while all other users pay $15 per month. According to CRM's CEO and Chairman Marc Benioff, Chatter has been the company's "most successful software release, ever."


Contrarian Takeaway:

Given the hype surrounding Facebook and Twitter in the financial media, it is hard to view this Bloomberg Businessweek article as anything other than being very bullish on CRM. From a contrarian perspective, this level of bullish media attention often bodes ill for a company's shares. However, CRM is deserving of some praise, with the stock up more than 48% on a year-to-date basis. What's more, the company also proved on Aug. 20 that it has fundamental strength as well as technical prowess, by blowing past Wall Street's second-quarter earnings expectations and guiding higher for the third quarter and full year.

However, the stock's overall sentiment backdrop is skewed toward the bearish end of the spectrum. For instance, more than 8% of CRM's float has been sold short, while the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.20, which ranks in the 66th percentile of its annual range, indicates that puts outnumber calls among options with less than three months until expiration. Wall Street is also holding out on CRM, as 14 of the 35 analysts following the shares still rate them a "hold" or worse.

So, while bullish media coverage can have negative implications for a stock, CRM could actually benefit from the added optimism. Should more media outlets take a bullish stance on the stock, we could see the remaining bears among short sellers, options traders, and analysts capitulate to CRM's strong price action, thus helping to perpetuate the stock's rally.

Joseph Hargett (jhargett@sir-inc.com)


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Live Nation Could Struggle to Find a Floor

Posted on 8/27/2010 3:57 PM

Publication: "Fortune"
Publication title: "Live Nation's tin ear"
Publication Date: 8/27/2010

KeyWords: LYV 

Brief Summary:

This negative article doesn't try to spare anyone's feelings with its frank analysis of concert promoter Live Nation (LYV). After observing that the company "can't seem to make any money," the author goes on to add, "Its stock continues to drown in the shallowest pool." The article then takes a contrarian skew, with the author saying, "…it's somewhat startling that a few well-heeled investors and hedge funds have kept to their bets on a turnaround." Bargain hunters shouldn't necessarily be lured by the equity's low price, concludes the author, because LYV is facing fierce fundamental challenges -- and company management seems completely tone-deaf.


Contrarian Takeaway:

LYV is just as cheap as the article suggests, with the stock trading around $9 as of this writing -- but it seems hard to describe the shares as a "good value." The stock has slumped consistently lower since early May, with resistance from its 10-week moving average acting as a steadily descending technical ceiling. The shares dropped through the closely watched $10 level in mid-July, and this looming round-number neighborhood could now act as an additional layer of resistance.

Plus, sentiment is just as strangely complacent as the author suggests. LYV's 10-day International Securities Exchange (ISE) call/put volume ratio of 30.74 rests in the 94th annual percentile, revealing that traders have purchased bullish bets over bearish at a rapid pace during the past couple of weeks. Meanwhile, Zacks reports that the only two analysts following the stock both maintain "strong buy" ratings, leaving ample room for downgrades or fresh negative coverage in the weeks to come.

Given this combination of weak price action, a troublesome fundamental backdrop, and lingering optimism on Wall Street, it seems safe to say that LYV hasn't hit bottom just yet.

Elizabeth Harrow (eharrow@sir-inc.com)


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Amazon.com Can't Rule the E-Book Market Forever

Posted on 8/26/2010 12:43 PM

Publication: "TheStreet"
Publication title: "Amazon Lauds Record Kindle Sales"
Publication Date: 8/25/2010

KeyWords: AMZN 

Brief Summary:

While Amazon.com, Inc. (AMZN) won't disclose actual numbers, the company boasted on Wednesday that its latest version of the Kindle is its fastest-selling e-reader ever. In fact, a spokesperson for AMZN claims that the online retailer is now selling more e-books than hardcover books -- which is quite a feat, considering that hardback books are the company's forte.

However, the road ahead is clouded with uncertainty, the author notes, as AMZN faces competition "from an increasingly crowded e-book market." Not only is Barnes & Noble, Inc.'s (BKS) Nook giving the Kindle trouble, but Google Inc. (GOOG) will debut its new tablet device shortly. AMZN seems well aware of this, and has cut the prices of its Kindle devices accordingly. But "with competition intensifying," the author warns, "Amazon will be forced to cut its Kindle prices further."


Contrarian Takeaway:

While AMZN has had blow-out Kindle sales (at least, that's what they say -- the company has remained highly secretive with regard to specific figures), the stock's technical performance of late has been less than thrilling. Since May, AMZN has been range-bound in the $115 to $130 neighborhood, with the $130 level providing a staunch technical ceiling for the shares.

Meanwhile, it seems that traders have boarded AMZN's bullish bandwagon, with the International Securities Exchange (ISE) reporting that 1.3 calls have been bought to open for every put during the past two weeks. This ratio ranks above 85% of all other readings taken during the past year, indicating that speculators on the ISE are initiating bullish bets on AMZN at a much faster pace than usual lately.

The brokerage bunch also remains on Team AMZN, with 21 out of 34 analysts deeming the retailer worthy of a "buy" or better rating.

However, with the bullish camp -- and e-reader market -- becoming more and more crowded, AMZN could soon run into trouble, both technically and fundamentally.

Sarah Wasserman (swasserman@sir-inc.com)


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Is Research in Motion Limited in Trouble?

Posted on 8/25/2010 9:58 AM

Publication: "CNN Money"
Publication title: "BlackBerry crumble: Why RIM is in trouble"
Publication Date: 8/24/2010

KeyWords: RIMM 

Brief Summary:

This article takes a grim look at the prospects for Research In Motion Limited (RIMM), which is lagging behind competitor Apple (AAPL) and its iPhone. The shares of RIMM have been pummeled recently, due largely to concerns that its anticipated new Torch phone is not selling as well as hoped. Many analysts and investors are concerned that consumers have abandoned RIMM's BlackBerry products in favor of smartphones such as the iPhone and those based on Google's (GOOG) Android operating system.

Pablo Perez-Fernandez, an analyst with MKM Partners, is one of the few willing to defend RIMM. Fernandez believes that RIMM has been unfairly punished and that it's a good bargain now. He also says that it's unfair to compare RIMM's BlackBerry to AAPL's iPhone, because the latter is so unique.

However, Chris Bulkey, an analyst with Technology Research Group, believes that RIMM is in the same boat Palm was last year, prior to its acquisition by Hewlett-Packard. "Research In Motion sells a commoditized product. There is margin pressure and the revenue growth is weak," Bulkey said. "Over the long term, they may need someone to bail them out like HP did with Palm if they see value in the technology."


Contrarian Takeaway:

Options players have developed a bearish outlook for the company as well. The International Securities Exchange (ISE) reports that 1.6 puts have been purchased to open for every one call purchased to open during the past 10 trading sessions. This ratio of puts to calls is higher than 99% of all those taken during the past year, pointing to a growing pessimism. What's more, the Schaeffer's put/call open interest ratio (SOIR) for RIMM comes in at 0.71, which is higher than 68% of all those taken during the past year.

However, Wall Street has been reluctant to completely shed its bullish outlook. According to Zacks, the stock has earned 26 "buy" ratings, 13 "holds," and four "sells." Any downgrades from this group could spell trouble.

Technically speaking, the shares of RIMM have retreated more than 30% since the beginning of the year. The equity has fallen under resistance at its 10-week and 20-week moving averages since early April. Considering the stock's lackluster technical performance, it should come as no surprise that pessimism is on the rise and should continue to weigh negatively on the shares.

Jocelynn Drake (jdrake@sir-inc.com)


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Online TV Won't Save DISH Network

Posted on 8/24/2010 3:31 PM

Publication: "The New York Times"
Publication title: "Dish Network Is Joining Other Carriers in Offering Its Content for Online Viewing"
Publication Date: 8/23/2010

KeyWords: DISH 

Brief Summary:

This week, DISH Network Corp. (DISH) joined several of its peers by providing online options to its paying subscribers. The company hopes that extending its services to other media will give its subscribers more options -- which will ultimately translate into more profit for DISH. "People are shifting where they watch video, and I want to shift with them," explained Senior Vice President for Programming Dave Shull.

However, the author warns that the kinks are still being worked out for these online programs, and there are also legal disputes raging over viewing rights and account log-ins. As such, Shull concedes that it could "take time" to work through all the technical issues.


Contrarian Takeaway:

All things considered, this online move seems like a half-baked effort to revive a struggling stock. Year-to-date, the satellite TV provider has surrendered 14%, underperforming the broader S&P 500 Index (SPX) by over 12% during the past 60 sessions alone. DISH is now docked beneath several former layers of trendline support -- most notably its 50-week moving average, which had supported the shares for the greater part of the past year.

Meanwhile, option players have been initiating bullish bets on DISH at a rapid-fire rate lately. In the past two weeks, traders on the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) have bought to open 42 calls for every put. This ratio ranks above 98% of all other readings taken during the past year, revealing that speculators on the ISE and CBOE have initiated bullish bets on DISH at a faster pace just 2% of the time during the past year.

However, there could be a less-than-bullish explanation for this heavy call volume. Short interest jumped by 8.2% during the most recent reporting period, and now accounts for nearly 3% of the stock's total available float. As DISH continues its downtrend, a massive call sell-off -- whether by defeated bulls or emboldened shorts -- could "shift" the stock even lower on the charts.

Sarah Wasserman (swasserman@sir-inc.com)


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Contrarians Take Note as Aeropostale Inc. Closes in on Technical Support

Posted on 8/23/2010 2:58 PM

Publication: "Barron's"
Publication title: "Aeropostale Set to Regain Altitude"
Publication Date: 8/20/2010

KeyWords: ARO 

Brief Summary:

While trendy teen clothier Aeropostale Inc. (ARO) has taken a sharp turn for the worst recently, the author of this Barron's article believes that the stock is set to recover. Fundamentally, despite ARO's softer-than-expected second-quarter revenue, the company had a "healthy quarter," the article says. The main issue with ARO's recent stint in the earnings limelight was its light third-quarter guidance. Still, many analysts adjusted their estimates accordingly, though the author believes that investors have "become accustomed to blow-out results."

The article also points toward the stock's plunge of about 25% during the past month, claiming that the sell-off is "overdone." In fact, "the shares trade cheaply, at just 7.9 times forward expected earnings, not far above its five-year historical lows," Barron's states. Wedbush Securities analyst Betty Chen agrees: "As we believe management's below consensus third-quarter guidance is primarily priced into the stock and the outlook provides the company with ample flexibility to maintain market share in the existing competitive landscape, we see the risk/reward as favorable on current discounted valuation."


Contrarian Takeaway:

The Barron's article comes close to making a contrarian case for investing in ARO, citing the overreaction to the company's recent quarterly report, and the stock's overdone pullback in the middle of a longer-term uptrend. There is even a wealth of pessimism surrounding the shares that could be brought to bear as potential sideline money to help push the shares higher.

For instance, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.97 ranks in the 60th percentile of its annual range. Meanwhile, short interest accounts for a respectable 9.4% of the stock's total float. Both of these groups could represent potential pools of buyers, if they were to be convinced that ARO will resume its longer-term uptrend.

Unfortunately for ARO, the growing concern regarding the economic recovery, the company's questionable earnings outlook, and the stock's troubling technical performance are all conspiring against the shares. Remember, in order for a stock to be a true contrarian play, it must either be rallying in the face of pessimism, or declining in the face of optimism. ARO is actually falling in the face of rising pessimism, which is generally considered typical price action for a stock.

Now, this isn't to say that ARO couldn't quickly become a contrarian play. The shares are showing signs of technical support in the $22.50 region, even in the face of resistance at their 10-day moving average. Until a solid rebound is in place, however, betting bullishly on ARO could be like trying to catch a falling knife.

Joseph Hargett (jhargett@sir-inc.com)


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Search Past Schaeffer's Daily Contrarian

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"When everyone thinks alike, everyone is likely to be wrong."
~ Humphrey Neill,
The Art of Contrary Thinking

The above quote has been reiterated numerous times in our publications because of its ability to succinctly capture the essence of contrarian thinking. While simple in theory, the task of capturing the prevailing sentiment can be as elusive as defining the boundaries of a cloud. The closer you get to it, the harder it is to see.

Even Humphrey Neill admitted the difficulties inherent in gauging sentiment:

"I found in my own case that it took several years, as a matter of fact, before I was able to weigh 'public opinion' with sufficient accuracy to feel reasonably confident of the contrary conclusion. It takes time to form the habit of thinking contrarily…I grant you that you will have to peruse a pile of news and comments."

Regular Schaeffer's readers are well aware that we use "hard" data such as put/call ratios and short interest to gauge the sentiment of stocks, sectors, and the market as a whole. Graphs and numbers are easy to quantify and show. What is not so easy to convey is the sentiment that is gathered from poring over numerous publications and scanning various news outlets. This information is embedded in our approach and used to make trading decisions.

At Schaeffer's, we have a team of analysts who track this "anecdotal sentiment" and pull it all together for our in-house research. The amount of information available is overwhelming and it would be impossible for one individual to stay on top of it all. Noting that Neill himself acknowledged the complexity of tracking numerous publications and the need for experience, we have launched a new column, "Schaeffer's Daily Contrarian."

This daily column will post summaries of current articles and provide a short take on how we view the article in a contrarian light. Some entries will give you insight into how we read media articles and how to merge small morsels into a tasty contrarian meal. Our goal is to constantly scan various media and news outlets every trading day and present some of what we feel provides a good contrarian read. We should note that not all articles will lend themselves to a contrarian interpretation. In fact, most will not.

What This is Not

First and foremost, "Schaeffer's Daily Contrarian" is not meant as a trade recommendation. These articles and our contrarian interpretation are but a small piece of a much larger analytical puzzle. Gathering anecdotal sentiment from a variety of sources and merging this with hard data is the hallmark of contrarian analysis. Here you get a first-hand account of how to go about this in real time.

It's also important to understand that getting a contrarian read from an article is by no means a poor reflection on the publication or its writers. A negative article on a high-flying stock may site accurate facts and be extremely logical. And more importantly, it could ultimately prove to be correct. However, experience has taught us that uptrends do not end until the final capitulation where it seems that everyone has finally given up their concerns. The market has shown time and again that short-term moves are often driven purely on emotions. By monitoring the comments made by analysts in the media, we can add this to our contrarian arsenal to gauge whether the capitulation stage has finally been reached.

At Schaeffer's, we have the years of experience and the ability to "peruse the piles of news." More importantly, we are willing to share it with you every day. It's almost like having your own personal team of contrarian analysts gathering and summarizing anecdotal information. We hope "Schaeffer's Daily Contrarian" becomes a resource you value as much as we do.

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