This easy contrarian inventory technique has had a blowout begin. Don’t preserve chasing it, warns Citi.

Last yr’s inventory losers are off to an important begin for 2023, however traders can be foolhardy to chase these positive aspects any additional.

That’s the recommendation from a workforce at Citigroup, led by chief world fairness strategist Robert Buckland, who word how a easy technique involving promoting the winners and shopping for the losers of 2022 has paid off due to a market rally, oil-sector profit-taking and surging tech shares.

They tallied up the efficiency of their so-called “Christmas Lunch” report that publishes on the finish of yearly, and focuses on contrarian picks throughout sectors, nations and property. “It is named in tribute to end-year stock picking competitions at investor Christmas lunches where few participants can resist making big contrarian calls,” explains the Citi workforce in a word launched on Monday.

On common, the ten bullish inventory picks made through the “Christmas Lunch” methods are collectively up 23% — they embody outperformers comparable to Meta Platforms
and Tesla
Bearish picks, comparable to Occidental Petroleum
and Exxon Mobil
are largely flat to this point this yr. That’s because the S&P 500
has gained 6% to this point in 2023 and the Nasdaq Composite
greater than 12%.

Here’s Citi’s chart summing up these performances:

In quick, the massive contrarian name for 2023 was bullish/lengthy on tech shares, after 2022’s dismal efficiency. The financial institution’s long-short fairness name, which principally dictates that traders take bullish positions in shares anticipated to understand and bearish positions in these anticipated to fall, peaked at 33% on Feb. 2, the strongest begin to a yr since 2011, Citi famous.

Buckland and the workforce say promoting winners and shopping for losers labored because of dovish alerts from central banks pushing bond yields decrease and tech shares increased, whereas hopes that the financial system will downshift slowly with out a recession — a “soft landing” — have weighed on defensive shares, and oil firms have dropped amid falling oil costs.

But they are saying it’s not unusual for these kind of contrarian methods to carry out nicely early on, as traders value in a reversal of the prior yr’s themes, however then fade amid the belief that little has modified.

“We think most of this year’s contrarian trades will fizzle out, as they usually do. Hence, we wouldn’t chase the headline equity indices higher, and prefer oil stocks to tech. China-reopening is one trade we would chase,” mentioned the Citi workforce.

That warning echoes what’s being heard elsewhere on Wall Street. Morgan Stanley’s Mike Wilson warned purchasers on Sunday {that a} speculative frenzy based mostly on false hopes surrounding the Fed is pushing shares right into a so-called “death zone.” JPMorgan has additionally been vocal about warnings that U.S. equities have peaked.

Also: The finish of simple cash is dangerous news for these inventory sectors, says Evercore

“We are wary of the soft-landing story and think EPS [earnings per share] forecasts are still too high, especially if the U.S. economy drops into recession in 2H23 [the second half of 2023]. The tech stock rally has left valuations looking stretched, and the sector is vulnerable to further earnings disappointments,” added Citi.

Tech shares haven’t been the one winners to this point this yr. Another die-hard “Christmas Lunch” contrarian technique that’s up 4% yr so far includes bullish positioning on rising and developed equities and bearish bets on the U.S. greenback and commodities, mentioned Citi. Country-specific contrarian methods that went bullish on Asia and the U.S. are additionally off to a powerful begin, whereas commodity-related markets comparable to Australia, Brazil and Canada are lagging.

And: Buy the stock-market dip? Why ‘cash’ yielding greater than it has since 2007 might be king.

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