Just when you think you have it figured out…

…the trends reverse.

Crowded trades get unwound and popular bets get taken to the woodshed. The story you’ve told yourself has been told so many times that there is no one on the other side. “Oil is dead money at best” and “The euro is headed to parity and beyond with the dollar” and “biotech is where all the earnings growth is” were great stories. They made perfect sense. They still might. But everyone knew these stories and had placed their bets accordingly.

The Wall Street Journal this morning, on what happened in April:

The euro strengthened 4.5% against the dollar in April after tumbling 11% in the first quarter.The U.S. benchmark crude-oil price soared 25% after declining 11% in the first three months of the year. The Nasdaq Biotechnology Index fell 2.8% in April after jumping 13% in the first quarter. Yields on German government bonds bounced higher after nearing zero last week.

25 cents of every dollar that went into an ETF in the first quarter had gone into a foreign equity ETF that was currency-hedged. Analysts spent the first quarter slashing their targets for crude oil in half. Biotechs became 35% of the health care sector and almost 20% of the Nasdaq index. Everyone was in.

And then the fever broke.

Narratives don’t tell you when a trade is maxed out. Guesses might. Technicals may act as a guide. But it’s never easy.

I swim in these stories all day. I listen to the smartest investors explain why they do or don’t believe in them, to my face. I attend conferences where these ideas are crystallized and consumed by the industry pros who then put money to work based on them. We field questions from clients about these memes. We’re forced to think about them and sometimes to act upon them – even if, by acting, it means we choose to do nothing.

The hard part is not figuring out what the most crowded trades are or knowing which stories are being most heavily bet upon. It’s knowing when ideas have been taken too far or something else has happened which will change things. And then getting the timing right.

Most people can’t do it every time. They nail some and then miss the others. You’ll only hear about cases of the former when you talk to them.

Try to keep that in mind.

Just when you think you have it figured out…it becomes really obvious to everyone else and then everything flips.

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