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October 22, 2009

Crowded Trades

Shorting the US dollar has become a crowded trade.

Macro players are buying US equities and shorting dollars as an asset inflation play. My concern is that they are driving that trade by the weight of investment.

Underweighted Equity books are then forced into the equity market even though fundamentals don't support it.

CTA's and Momemtum traders are drawn in: pushing equity and currency moves further.

And finally, we hear that these equity movements are a "response to the sucess of fiscal stimuli" and "further proof that the market is re risking".

All of these lead me to conclude that:

Equities are riskier at these levels than the market believes.
The US Dollar is a less compelling short than it has been for the last year.

Look for round two of derisking.

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