Contrarian investors take note. According to the latest fund manager survey conducted by Bank of America-Merrill Lynch, the most crowded trade you can be involved in at present is being long the US dollar.
According to the survey every man, woman and child is currently betting on the buck, enticed by the prospect of higher US interest rates propelling the currency higher.
32% of investors think the trade is the most crowded at present, double those deemed to be the next crowded (being short commodity stocks and emerging market equities).
Crowded positioning suggests that a trade is one-sided, increasing the likelihood of a savage reversal should the factors used to underpin the trade prove to be incorrect.
Essentially, when there is no-one left to buy or sell a particular asset, the price has no option but to stay static or move in the opposite direction.
All one must do is look at the price action in crude oil futures over the past 24 hours, and the subsequent reaction in energy stocks, to see just how far an asset price can move when everyone is betting in the opposite direction.
A gain of 3% in crude prices, following a 8% rout last week, was enough to propel energy sector stocks higher by an even greater margin – all without even the faintest whiff of fundamentals being required.
Given the findings of the BAML survey, those betting on further US dollar gains are pinning their hopes on the US Federal Reserve raising interest rates for the first time since June 2006 when they meet in mid-December.
While FOMC members have been priming the markets for such an outcome to take place, if they don’t, it could prompt one almighty unwind of long US dollar bets.
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