What's the Crowded Trade?

10/07/2013 12:00 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

At the end of the September the data on the S&P 500 suggests to MoneyShow's Jim Jubak that one side of the market, long or short, is quite crowded.

There's a concept that my friend Peter Cherer uses called crowded trades. Basically, he looks at where the money is, how many people have put on bets for the market to move one way or another, and what he's asking are important questions like, "Well, how much more money is there that could go the way the market is going now, so it will keep on going in that direction, or what would it take to reverse that position and make money go in an opposite direction?"

Right now, in the equities markets, it looks like we've got a very crowded trade on the long side of the US and the European market, that, as of September 27, we had only about 2.4% of all shares for the S&P 500 companies lent out on the short side of the market. You remember how a short works, you borrow shares, somebody has to loan them out for you to borrow them. You borrow shares, sell them, and then hope to pay them back with shares that you bought at a lower price.

If you've only good 2.4 out there, 2.4% of shares that are borrowed to put on shorts, this means there are relatively few shorts, means that almost everybody in this market is long or sitting on the sidelines. That puts this as a crowded trade. The company that put together this data called Market Securities also looked at Europe, and sees that short positions in Europe are at a low since they began tracking this data in 2006. He had a lot of people betting long. They're willing to look past the government crisis in the United States, past the government crisis in Italy, and they see a recovery in Europe gradually. They see the fed being pushed to the sidelines by the turmoil in the United States, so the fed won't go into a taper.

They see all those things as being positives, and therefore they want to be on the long side of the market. Whether this is really a logical position or a reaction to everybody being short the market and getting burnt this year as the market went up 15%, 16%, whatever, in the United States, I think it's got a lot to do with people reading past history and saying we don't want to be on the wrong side of this. Every time we've bet against the market, we've been wrong, but right now you've got a really, really crowded trade on the long side of the market, doesn't mean the market can't go up, but it means that the down side here for that supposition, that complacency, that feeling about the market being wrong, is fairly high, because there's not a whole lot of money on the other side of this trade right now.

This is Jim Jubak for the MoneyShow.com video network.

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