Crowding is Back

Don FishbackUncategorizedLeave a Comment

I recently recorded a video about market fragility and how Dispersion Trading can be an elixir to markets that experience explosive volatility out of nowhere.

But what causes that explosive volatility in the first place?

The answer is low liquidity.

Rising rates have a lot to do with it.

But another factor is “crowding”. And there are two developments that indicate crowding could be a problem at some point in the future.

I like to think of crowding as “herd mentality”. That is, everyone doing the same thing.

It’s that herd mentality that prompted us to exit from the stock market in October in our Three Easy Factors market timing service, thus side-stepping the carnage. The disappearance of the herd mentality after the Christmas Eve debacle is what prompted us to hop back in with both feet very close to the market bottom.

Well, here are quotes from two articles – one in The Wall Street Journal yesterday and one on Bloomberg today – that make me want to take a deep breath:

“In one regard, though, equity managers haven’t changed much. It’s their propensity to all own the same thing. That can be seen in a measure of crowdedness in the market that’s higher than it’s been in two years. Goldman Sachs assesses the trend by counting how many companies are among the 50 most-owned by hedge funds and mutual funds alike, going by filings. Right now it’s 13, the most since early 2017.”

Stock Crowding Risk Is Back With Everyone Buying the Same Thing, Bloomberg

“…the profusion of ETFs based on the same or similar stocks makes markets more vulnerable in times of volatility.”

In a Down Market, ETFs Could Make Things Even Worse, The Wall Street Journal

Crowding, herding… it doesn’t matter what the name is. The bottom line is that it all involves “owning the same thing”. Which is great when the market is headed higher.

But when it turns, and when the liquidity provider is a robot that has been trained to turn off when the market breaks down, things can go very sour very fast.

That’s why Dispersion Trading can be so valuable.

If you’re into options and want to know more about Dispersion Trading, or if you want to learn more how three simple factors can improve your stock market investing, just give us a call: 855-777-ODDS

P.S. – Both articles are behind a paywall. But I thought each was important enough to mention anyway.