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4 Trade Ideas From Crowded Long And Short Positions

Published 07/27/2014, 01:07 AM
Updated 07/09/2023, 06:31 AM
GBP/USD
0.00%
EEM
-0.29%
SPY
-1.71%
DX
0.24%
IYZ
-1.02%
FEZ
-0.64%
TLT
1.21%
XLE
-2.08%

I have been meaning to write about this, but other, more important things seemed to get in the way. The latest BoAML Fund Manager Survey shows managers to be well overweight risk and equities (via The Telegraph):

Bank of America’s monthly survey of world fund-managers shows that investors have their second highest allocation to stock markets in thirteen years at 61pc. It is led by shares in technology, energy, and even banks, and is stretched to a net 35pc overweight in Europe. “The summer 'melt-up' is likely to be followed by an autumn correction,” it said.
Global Equity Allocation, 2004-Present

Four contrarian trades
Further, the report suggested four contrarian trades that appeared somewhat intriguing:

Bank of America recommends four contrarian trades (for the brave only of course, not for Welsh widows) based on herding effects. Go long bonds, and short equities; long the US dollar / short sterling; long telecoms (the most reviled equity group), and short energy; and long emerging markets/short eurozone.

When I consider contrarian "value" trades, I prefer to look for entry points where there is not only "value", but a positive catalyst that propels the trade in the right direction. When I evaluate the four from a technical perspective, I find one to be in that category, two that appear to be nearing a trade setup and one in a wait-and-see mode.

The first chart shows the long Emerging Markets (via iShares MSCI Emerging Markets ETF (ARCA:EEM)) and short eurozone (via SPDR Dow Jones Euro STOXX 50 ETF (NYSE:FEZ)) equity pair trade. Note how EM equities have bottomed out and begun a relative rally against eurozone equities - that is the positive catalyst that I like to see.

EEM vs FEZ Daily
The second and third are intriguing trade setups, but I am not quite ready to pull the trigger yet. Here is the long bond)-short (US equity) pair chart below. Long Treasuries (via iShares Barclays 20+ Year Treasury (ARCA:TLT) have broken out of a relative downtrend against US equities and they appear to be undergoing a sideways relative consolidation period. This is somewhat intriguing given the sentiment background, but I would wait until a relative breakout by bonds before making a significant commitment to this position.
TLT vs SPY Daily
Similarly, the long Telecom-short Energy pair shows a similar pattern of rallying through a relative downtrend. While there may be some tactical short-term upside, these pairs typically undergo a sideways consolidation period before staging a relative upside breakout.
IYZ vs XLE Daily
The last is the long USD-short GBP pair. Below is the chart of sterling. GBP is still in an uptrend. At the very least, wait for the break through the trend-line before shorting sterling.
XBP Daily
In conclusion, sentiment analysis can uncover intriguing trades based on crowded long or short positions. Combining sentiment analysis with inter-market technical analysis is another way to see the progression of how the trade may be setting up and can be useful in timing entry and exit points.
 
Disclosure: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

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