What Wall Street Thinks Is The Top "Tail Risk" And Most Crowded Trade

While earlier we showed the key highlights from the latest Bank of America fund manager survey, the two items that most readers, and traders, gravitate to, is i) what Wall Street thinks is the biggest tail risk at any given moment, and ii) what is the most crowded trade (in a notable departure, December's answer here was bitcoin).

In January according to 163 active fund managers with $510BN in AUM, the top 3 "crowded trades" are

  • #1 long FAANG/BAT (26%),
  • #2 short US$ (20%),
  • #3 short volatility (18%);

Notably, back in January Wall Street respondents said that "Short Vol" was the most crowded trade. In retrospect they were right.

What about tail risks? Here Wall Street believes that an inflation-induced bond crash (45%) remains at the top of the list of tail risks cited by investors; the top three are rounded out by a policy mistake by the Fed/ECB (18%) and market structure (13%).

This is the second month in a row in which inflation and bond crash remain the top risks. As BofA notes, a strong US$ and lower yields would be painful.

Meanwhile, even as traders fret about inflation and bond selloffs, they remain extremely optimistic, with 91% saying a recession is unlikely, while respondents were most bullish on profits since 2011. Here a caveat from BofA: strong EPS remains the most likely positive risk for stocks, while interest rate catalyst is slowly reversing, leaving EPS as lone driver for risk assets. This means that if, for whatever reason earnings fail to meet Wall Street's lofty expectations, the second - and far more violent part of the selloff - will begin.


Snaffew USofAzzDownWeGo Tue, 02/13/2018 - 10:23 Permalink

it's a wildly overbought momentum stock with a large market cap that the lemmings have bought into and priced into the stratosphere that believe growth is good at the expense of free cash and free cash flow.  Valuations don't matter to the fangs, as long as they keep biting the pockets of anyone short with their long, sharp, financially honed teeth.

In reply to by USofAzzDownWeGo

TradingTroll Tue, 02/13/2018 - 11:21 Permalink

No, the most crowded trade is that of paper promises...in an economy where trust is nearly extinct.


So we use our energy infrastructure to mine crypto currencies as a substitute for trust.


LOL! Won’t work, but it makes for great momo trading!!

Let it Go Tue, 02/13/2018 - 22:41 Permalink

After years of central bank stimulus, many investors have become convinced of the idea that "central banks will never let markets go down." The so-called FANG stocks have accounted for much of the stock market rally we are witnessing, however, it might be wise to step back and question the fundamentals behind the upward movement of these stocks.

It is logical that these so-called bright spots that have pulled the market higher also have the most room to fall as valuations retreat. Signs that central banks are becoming more concerned about asset bubbles growing as a direct result of their actions is in the air. A massive surge in debt across the globe as consumers, businesses, and governments have thrown caution to the wind setting up a scenario that ends in tears. The article below explores why the FANG stocks may suffer most.

http://FANG Stocks Have Potential To Really Bite Investors.html