Herd-mentality, group-think, safety-in-numbers, or lemmings. When a trade becomes one-sided, we are often taught that contrarianism is the smarter position. When a trade becomes extremely one-sided, the market is at its most fragile. There are currently three trades that have become not just consensus, but are near record levels of extreme positioning - and with the help of leverage (and record margin levels) this all adds up to a risk-on market (since all the three trades are on the same side of the long central bank largesse, short safety view) that is over-prone to more significant corrections. Join the crowd or join the smarter money?
Crowded Trade #1 - US Equities.
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Crowded Trade #2 - Short JPY
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Crowded Trade #3 - Short Precious Metals
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and it's at record-levels of margin...
Current levels of both Net Free Credits and Margin Debt indicate extremely bullish sentiment in the equity market, the implication is contrarian bearish.
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But the 'smart money' is hedging...
Based on BofAML's exposure analysis, macro hedge funds continued to add to their shorts in risk assets including the S&P 500, NASDAQ 100 and commodities.
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Charts: BofAML