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Shorting European Equities Is Crowded—Could It Mean a Reversal?

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Most crowded trade

According to the latest Bank of America Merrill Lynch survey, shorting European equities (HEDJ) has been the most crowded trade for two months in a row. In March, for the first time in the history of the survey, short European equities (EZU) were listed as the most crowded trade. In April, 25% of respondents cited them as the most crowded trade.

Uncertainty surrounding Brexit proceedings, manufacturing slowdowns, and other issues in many European countries have made investors wary of the region.

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FAANG and BAT are the second most crowded trades

The second most crowded trade remained FAANG and BAT stocks—US stocks (SPY) Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Google (GOOGL) and Chinese stocks Baidu (BIDU), Alibaba (BABA), and Tencent (TCEHY)—which dominated the most crowded trade list for most of 2018 but fell hard in the fourth quarter.

US dollar

The long US dollar (UUP) (USDU) was the third most crowded trade, with 17% of investors citing it as such. Investors should, however, consider the most crowded trades with a grain of salt. Mostly at the extremes, these trends work as contrarian indicators. Therefore, contrarian investors can take long positions in European equities and might do well to short FAANG, BAT, and the US dollar. With the Fed signaling a short-term end to rate hikes, the outlook for the US dollar has deteriorated.

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