June’s ‘Most Crowded’ Trade Reflects Investors’ Risk-Off Mindset



Most crowded trade

According to the latest Bank of America Merrill Lynch survey, government bonds are the most crowded trade. It is the first time in the history of BAML that the preference for Treasuries has topped the list. The US government bonds were cited by 27% of the fund managers, topping long tech trade, which came in second.

The most crowded trade also signals that investors are in risk-off mode and are heading to safe-haven assets. This is in line with what some billionaire investors have also been recommending.

In Druckenmiller Suggests These Two Trades to Hedge against Meltdown, we discussed that as the Fed rates could go to zero in the next 18 months, bond prices (BND) have jumped while yields have slumped. He said that while Treasuries (TLT) might have become less interesting after their recent rally, they are “the best game in town” if the economy deteriorates. He also likes gold (GLD) in this environment.

In Gundlach Recommends Closing Trade that Generated 22% in a Month, we discussed that in May 2019, Gundlach recommended investors take advantage of the volatility in interest rates. Gundlach particularly recommended using the iShares 20+ Year Treasury Bond ETF (TLT) to execute this trade. This trade generated 22% in a month, after which he recommended closing this trade.

Tech is the second most crowded trade

The second most crowded trade was tech stock, especially the FAANG and BAT stocks, which include US stocks 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 18% 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.

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