Can the US Dollar Remain the Most Crowded Trade?

For the second straight month, the so-called FAANG and BAT stocks—US stocks Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Google (GOOGL) and China’s Baidu (BIDU), Alibaba (BABA), and Tencent (TCEHY)—weren’t the most crowded trades. Before this, they’d remained in the top spot for ten straight months.

Last month, the US dollar (UUP) replaced the FAANG and BAT stocks as the most crowded trade, and it’s maintained its position in January. The long USD topped the list, with 21% of investors citing it as the most crowded trade and 19% citing FAANG and BAT.

The allure of tech stocks, which sustained for the majority of 2018, has been fading. Over the past few months, tech stocks have disappointed the markets. Apple, in particular, has driven the recent sell-off in tech due to mounting concerns over its iPhone shipments, the US-China trade standoff, and weak guidance. While some FAANG stocks, such as Netflix, are making a comeback, risks still remain for the sector.

Headwinds for tech stocks (QQQ) are increasing given rising costs and increased regulatory scrutiny. The trade war between the United States and China is hitting tech stocks especially hard. It’s difficult to say whether these stocks’ high valuations are due to a bubble or are actually supported by future earnings growth, but investors are definitely wary of the bull run.

In contrast, the US dollar (USDU) was on a fairly strong upward trajectory in 2018, rising ~6% against a basket of currencies. The Fed’s interest rate hikes and outlook, trade war concerns, and a better US market (SPY) (QQQ) performance were the key drivers of the US dollar’s strength.

However, it remains to be seen whether the dollar can remain the most crowded positioning of fund managers for long, as the poll also says that the dollar’s valuation is at its highest point since 2002. Moreover, the Fed’s dovish stance in 2019 could put pressure on the dollar.

After the US dollar and FAANG and BAT stocks, the third-most crowded trade was short emerging markets (EEM).