One investing term that one hears less of is that of a "crowded trade."
While I have yet to find a concise definition of such, I believe that a "crowded trade" has characteristics including the following:
- A large number of participants who have similar beliefs (i.e. a large imbalance of sentiment)
- A heavy presence of short-term speculators as opposed to long-term holders; this often includes "hot money"
- A history of rapid, significant price appreciation in the underlying asset(s) or sector
"Crowded trades" should be viewed with caution as these characteristics likely accentuate price moves and, at some point, volatility. Often, the large imbalance of sentiment leads to overextension in the price movement, which is susceptible to dramatic revision if/when the "crowd" changes its opinion in part or in full.
I view the "crowded trade" as akin to a large, packed movie theater with a single, narrow exit. As long as few want to leave the theater (i.e. nearly everyone shares similar beliefs and as such is content with staying in the theater) everything is fine; but problems arise if/when many or most of the people in the theater suddenly want to leave, only to find they can't quickly exit due to the single and narrow exit.
The stock market currently strikes me as being a very "crowded trade." One is struck by the endless bullish commentary prophesying continually rising earnings, supported by - and ostensibly "guaranteed" by - the ultra-low interest rate environment, QE2, etc. As well, economists share a highly unified belief of moderate economic growth into the future.
Of course, there is also the very strong "price action" of both the overall stock market as well as many individual stocks, especially since September - but also dating back to what I view as the start of this current rally, the lows of March 2009.
While "crowded trades" don't necessarily presage disaster for their investors, I believe that on an "all things considered" basis the aspects that make the stock market a "crowded trade" present considerable, and increasing danger, for stock market investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
