The Pain Trade For The Most Crowded Trade In The world - BofA Merrill
"A single investment thesis has been directing global capital flows over the last two quarters – the consensus that the decoupling of the US economy from the slow growth of the rest of the world will continue. As a result, the USD and US equities have significantly outperformed, while US Treasuries have underperformed:
..The collapse in oil prices over the past two months has provided a further boost to the US decoupling trade as lower energy prices have been viewed as good for US consumers, thus supportive for US equities and the USD. In this sense, the long USD, long US equities and the short energy trades have become one single trade.
Chart of the Day shows the magnitude of the positioning behind the trade may be reaching a dangerous level. CFTC net non-commercial length in S&P 500, USD (especially against the EUR) and crude oil were all at their 52-week extreme as of Tuesday last week. These observations are also supported by our proprietary MAA analysis.
While we remain positive about US economic fundamentals, we are concerned that positioning makes the US decoupling trade vulnerable to shocks. We are also concerned that the trade may have limited room to advance in the short term as it seems unlikely that two legs of the trade (rising USD and falling energy) can continue without creating problems for the third leg of the trade (rising US equities)."