It's a Crowded Trade
10/03/2013 11:00 am EST
This crowded trade statement currently is apropos in regards to US and European equities, writes MoneyShow's Jim Jubak, also of Jubak's Picks, however, that does not mean these stocks have to decline.
It's one concept that my friend, Peter Tchir, of TF Market Advisors, uses to assess the potential risk and reward of a strategy. In concept, it's pretty simple: Look to see how much of the market, how much of the available money, is already lined up on one end of a trade or the other. And ask, how much more money is available to further push up an already popular trade, or what it would take to get money to flow into the currently unpopular end of a trade. (The concept is simple. Where Peter and his partner Jeremy Hill excel is in figuring out how to measure how crowded a trade might be.)
Looking at the markets right now, I'd have to say, being long US equities is a very crowded trade.
As of September 27, Markit Securities reports that only 2.4% of the shares in the companies on the Standard & Poor's 500 are out on loan to short sellers. That's near a record low.
Granted that number may have changed in the days leading up to an actual government shutdown, but given the performance of the market in the last few days, I don't think short interest has climbed significantly. (To go short, after all, you borrow shares and then sell them, and I don't see a wave of selling recently.)
Markit's data shows an equally crowded long trade on European equities with short positions on European shares totaling just $144 billion, the lowest level since Markit began tracking this data in 2006.
This crowded trade doesn't mean that US and European stocks have to go down. The bet right now, which sees the shutdown of the US government as a minor road bump, is on third quarter earnings. "For the last five quarters, stocks have climbed on the day that the company has announced its earnings,” according to Bespoke Investment Group. That's the longest streak in at least a decade according to Bespoke's data.
But it does suggest that the upside to this trade is limited by the popularity of the trade, and that the downside is relatively large if either the budget/debt ceiling battle is more serious than expected or if earnings in the third quarter, which begin with Alcoa (AA) on Tuesday, October 8, disappoint.
Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of any stock mentioned in this post as of the end of June. For a complete list of the fund's holdings as of the end of June see the fund's portfolio here.