In recent years sell side dealers like Goldman, Bank of America and Citibank have been aggregating their client holdings data from their respective prime brokerage units.
After a look under the hood, they analyze the data to come up with themes and trends. We spend a lot of time reading street research and developing our own conclusions, most of all looking for crowded trades. Since late 2013, the one investment strategy that’s been very successful has been found in determining in what moments too many investors are crowded on “one side of the boat”. With rates near zero globally, returns have become harder and harder to come by, the net result is a lot of clowns stuffed into one corner of the market reaching for alpha.
“In the first six week of Q3, funds raised equity market exposure sharply, bringing net leverage near 12-month highs through a combination of record call option buying, longer net futures exposure, and short covering in addition to adding leverage in their favorite long stocks.”
Goldman Sachs
With the market at all time highs we’re seeing a significant amount of chasing. Those who didn’t have the courage or the wisdom to buy the Brexit fear lows are piling into stocks at the fastest level in over a year. We’re seeing surge in net long exposure to 65%, approaching the highest levels in 12 months.
S&P 500
Today: 2183 (Net Long Exposure 65%)
Feb Lows: 1810 (Net Long Exposure 47%)
Goldman, Citi, BofA data
In February, net long exposure was below 50%, the hills were full or bears. One by one, as the timid bulls came out of hiding, the market has surged higher and higher.
The Herd is Levering Up
Shorts Carted Out
We often hear “this is the most hated bull market of all time.”
This is absolutely not true! A look at the S&P 500 shows share of equity market capitalization “held short” is at 12 month lows. If fact, shorts are 20% lower since September and have come down 16% since the February lows. Lets NOT kid ourselves, many shorts have taken their ball and gone home.
Everyone Wants to BUY Calls, You Can’t Give Away Puts
One thing we stress to subscribers is DON’T over trade. Over the last 3 years if you sat in the boat and waited for real fear, then put money to work, you’re likely doing better than the market. Of course, this is easier said then done. The Put-Call Ratio has been a solid buy signal. We recommended subscribers buy both the Brexit and China devaluation panic. One reason why is found in the put call ratio. Since late 2013, if you bought stocks while everyone is buying puts you have done very well.
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