The Trend

One of the Worst Trades to Take

“Hedge funds have never been this long crude oil,” blared the headlines in February 2017.

By March 2017, oil would plunge from a high of $55 to $47.

“Hedge funds have never been as bearish as they are right now,” they blared in May 2016.

At the time, the Dow traded at 17,500.  It’s now up to 20,884.

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“Hedge funds haven’t been this bullish on Canada since 2013,” they blared in March 2017.

Since then, the TSX Composite fell from 15,600 to 15,400.

“Hedge funds have never been this bullish on silver,” they blared in April 2016. 

Since then, silver fell from a high of $18.50 to $16.

Problem is – it’s not just one fund, or one trader packing into the same trade.  Instead, a great number of traders are following each other into the same trader, over-crowding it.  The idea is that all of these traders must know something I don’t.

Since I don’t want to miss out on what they may know, I need to buy.

Unfortunately, that’s one of the worst trading decisions you can make.  Should you buy because every one else is you’ve set yourself up to fail, as another sheep in the herd.

Look at silver for example. 

In April 2017, silver was benefiting from a rebound in industrial demand, particularly from China. As a result, ETF managers began to switch from gold to silver.  Even larger scale speculators in hedge fund began to buy silver en masse.

In fact, funds were dramatically raising their silver bets at the time.

According to the CFTC Commitment of Traders report, longs built a bullish position on 9,575 tons of silver – the highest level since 2006.  At the same time, shorts began to cut their bets, too, which sent the silver long positions up by another 7,680 tons.

In short, all of these speculators rushed into silver, blissfully unaware of hazard.  Shortly after, the price of silver fell from a high of $18.50 to $16. 

The only folks that love crowded trades in silver, gold, oil, and stocks are the smart contrarians.  Based on history, they’re very much aware of the doomsday scenario that can – and often will – play out following a crowded situation.

Within days of crowding oil, it reversed down.  Within days of crowding gold, it crashed not long after.  Within months of becoming too bearish, the Dow Jones skyrocketed.  In short, be aware of where folks, funds and speculators are crowding a trade, and you stand to potentially benefit.

One way to capitalize on stocks about to move is to spot a chart pattern that usually triggers a breakout. Click here to learn more.