Most crowded trade
For the first time in the history of the Bank of America Merrill Lynch Survey, “long” emerging markets (EEM) has been the most crowded trade for February, cited by 18% of the managers. This shift becomes even more interesting given the fact that just last month “short” emerging markets was the third most crowded trade. After a terrible year for emerging markets last year, this year is turning out very well for them. Year-to-date, emerging market stocks are up ~8% as compared to a loss of 17% last year. In particular, Brazil (EWZ) is off to a flying start to the year.
Investors should, however, take this information with a grain of salt as at extremes, these trends work as contrarian indicators. Extreme bullish sentiment usually indicates a peak followed by incoming bearishness and vice versa. The most recent case in point is the popularity of the so-called FAANG+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)—which dominated the most crowded trade list for most of 2018 but fell very hard in the last quarter of 2018. Thus, according to contrarian trade, emerging markets are ripe for a sell-off, and investors may try to stay away from them.
Other most crowded trades
Closely following the “long EM” trade was last month’s most crowded, “long US dollar (UUP),” cited by 17% of the respondents. The allure of tech stocks has been fading. Over the past few months, tech stocks (QQQ) have disappointed markets (SPY). Investors cited FAANG+BAT as the third most crowded trade.