Simpleton contrarianism is dead in the markets. At least for the time being. What is simpleton contrarianism? The best current example: Believing FANGs will fall simply because everybody is invested in them. The markets have moved up multiple levels in the meta-game ladder to allow such a simple thought to be rewarded. The degree of difficulty has evolved. The game has shifted.
Simpleton contrarianism cannot, however, quantify the precarious nature of what is occurring. Zoom out for a moment and look at the developing market landscape from an adversarial standpoint. The markets have managed to convince managers of ETFs, hedge fund managers, investment advisors, domestic retail investors, foreign retail investors, sovereign wealth funds, pension funds, analysts and investment banks that FANGs are their best chance, without question or equivocation, to outperform the markets.
There has been a herding, so to speak, of the entirety of the investment community, with a near religious fervor, into what is possibly the most concentrated allocation of investments in the history of Wall Street. This allocation controls not only the future returns of investors, but to a great degree performance of the economy, psychology of consumers and the mental output of investment managers in their attitudes towards other investments. In other words, as long as these investments continue to perform, they have no reason to do any digging. The common wisdom is the path of least resistance until it isn't.
Question is what happens when it isn't? The path towards any conceivable exit within such a narrow door will be impossible to navigate adequately. This means that any attention paid towards a tangible method of controlling risk will be an exercise in futility. At the same time, the downside will be as sudden as anything we have experienced in the past several decades. The entirety of the pullback, whether 20, 30 or 50 percent can happen within a very short time frame due to the dynamics involved.
While the price patterns for companies like AMZN and FB are irrefutably bullish going into their Q2 earnings reports, that is only a small portion of a much more significant story.
The markets have effectively gathered investors of all shapes and stripes into one small room, convincing them all that their best interests are being served by being gathered in the same place, with the same portfolios, at the same time, with the same expectations. And investors are only too happy to listen, forgetting the fact that if there is one thing that has been historically consistent about the financial markets, it's that they punish consensus opinion. The more significant and compelling the opinion, the more severe the punishment.
The herding of Wall Street around FANGs has only one possible ending. Guard your grill.
