Contra Market

Posted in Finance, Accounting and Economics Terms, Total Reads: 372

Definition: Contra Market

Contra market refers to a market in which the movement of stocks/other underlying is in opposite direction to that of the regular market index.



To put it in simplistic terms, it can be said that a contra market has a negative correlation to that of a normal stock market. So when the economy is in a boom and regular market stocks are on a bull run, the contra market experiences a lull. On the other hand, when the economy faces a recession, a contra market thrives on the market lull.



Contra market is characterized by select sectors, stocks, and in some cases, certain indices. For example, there are industries like confectionary (especially chocolates), pharma and electric utility, that are generally unaffected by the economic cycle. Stocks of such sectors remain relatively stable, and in some instances even beat the market, during an economic turmoil. This is because people do not limit their spending on medicines or electricity during a recessionary period. People even tend to indulge more in quick comforts like chocolates as they cut down on their day-to-day budgeted expenditure.


Such sectors are thus neutral to economic cycles and are termed “defensive” sectors. They are opposite to “cyclical” sectors that move in line with the economy.


VIX (Volatility Index) is an index that generally moves opposite to that of regular market indices. This is because VIX movement is based on the volatility in stock price movement, which increases as the risk associated with the stock price increases. Hence a VIX index does better during a recession when the actual stock price goes down, but the volatility of price movement increases considerably. For this reason, VIX is sometimes called a “contra-index”.



There are positives to investing in contra market stocks as there is the possibility of buying them cheaper. In a boom market, cyclical stocks perform well and so they also tend to be expensive. On the other hand, contra stocks trade cheap and have the assurance of performing well during economic lows also.



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