GO
Loading...

Market Alert: Investors Crowd Into New ‘Can’t Miss’ Trade

Housing prices never go down. That was the basic belief, magnified by an explosion in derivative instruments, which fueled a broad bull market, made record profits for investment banks and then brought our financial system to the brink.

CNBC.com

Now some fear the Wall Street lemmings have found their next ‘can’t miss’ maxim: Ben Bernanke won’t ever abandon us.

The correlation between asset classes has reached levels seen just before the infamous implosion of hedge fund Long Term Capital Management, according to a report from Bank of America Merrill Lynch.

The forever-accommodative feeling in the markets has flooded a simple macro trade: Buy stocks, buy commodities, sell the U.S. dollar.

“There is one bet right now: Bernanke will bail out the world,” said Brian Kelly of Brian Kelly Capital. “If that does not happen, then no investment will be safe.”

While markets fell on Wednesday, it still proved the ‘one trade’ theory as investors just went in the risk-off direction. Stocks fell, commodities fell and the dollar showed strength. A string of poor economic reports and Moody’s downgrade of Greek debt were to blame.

Still, the stock market is down only slightly from its bull market high reached last month as the predominant bet still seems to be that the Federal Reserve, either through another round of bond purchases or another creative way, will keep pumping liquidity into this market and push investors into risk assets.

“When cross-asset correlations are high, it means that many investors are essentially in one trade, even though they may not be aware of it,” said Bank of America Merrill Lynch’s Ruslan Bikbov and Priya Misra in the report to clients. “If investors exit at the same time, market movements could be chaotic.”

The market’s most popular measure of volatility – the CBOE VIX index – surged 14 percent Wednesday as more investors in the options pits bet that there may be a "black swan"—or unforseen—event to break up this smooth ride. Merrill and other hinted it could be an unexpected event in the global bond markets.

“The last shoe to fall, to push volatility significantly higher, will be debt issues coming from both the US and Europe,” said Brian Stutland, who trades volatility futures for his firm, Stutland Equities. “Keep an eye on that. I certainly am watching.”

Merrill echoes a similar sentiment in the report, stating, “If another major risk factor suddenly arises, for example something related to the U.S. debt ceiling, we could see a great increase in market volatilities.”

Money flows certainly back up the notion that this big macro bet on whole markets is the most popular, just as housing was before that crisis.

Hedge funds globally took in $102 billion in the first quarter to a record $2.02 trillion in assets, according to Hedge Fund Research. Funds focused on macro strategies had the biggest inflows, at $12 billion.

For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.


______________________________________________________
Got something to say? Send us an e-mail at fastmoney-web@cnbc.com and your comment might be posted on the Rapid Recap! If you'd prefer to make a comment, but not have it published on our Web site, send your message to fastmoney@cnbc.com.


Trader disclosure: On June 1, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s “Fast Money” were owned by “Fast Money” traders; Accounts Managed by Brian Kelly Capital own (ANDE) calls; Accounts Managed by Brian Kelly Capital own (BHP); Accounts Managed by Brian Kelly Capital own (IAU); Accounts Managed by Brian Kelly Capital own (NLY); Accounts Managed by Brian Kelly Capital own (NEM); Accounts Managed by Brian Kelly Capital own (TLT) calls; Accounts Managed by Brian Kelly Capital own Aussie dollar; Accounts Managed by Brian Kelly Capital own Canadian dollar; Accounts Managed by Brian Kelly Capital own Swiss franc; Accounts Managed by Brian Kelly Capital own Hong Kong dollar; Accounts Managed by Brian Kelly Capital own Mexican peso; Accounts Managed by Brian Kelly Capital own Swedish krona; Accounts Managed by Brian Kelly Capital are short yen; Terranova owns (XOM); Terranova owns (KSS); Terranova owns (CVI); Terranova owns (OXY); Terranova owns (TM); Terranova owns (BJ); Terranova owns (DIS); Terranova owns (PFE); Terranova owns (V); Terranova owns (HPQ); Terranova owns (FLX); Terranova owns (JPM); Terranova owns (MCD); Terranova owns (PEP)
Terranova owns (VRTS); Terranova is short (DELL)

For Joe Terranova
Virtus Investment Partners Owns More Than 1% Of (ABAX)
Virtus Investment Partners Owns More Than 1% Of (AMKR)
Virtus Investment Partners Owns More Than 1% Of (CCG)
Virtus Investment Partners Owns More Than 1% Of (CASS)
Virtus Investment Partners Owns More Than 1% Of (CSWI)
Virtus Investment Partners Owns More Than 1% Of (EXR)
Virtus Investment Partners Owns More Than 1% Of (FCFS)
Virtus Investment Partners Owns More Than 1% Of (IGE)
Virtus Investment Partners Owns More Than 1% Of (KRC)
Virtus Investment Partners Owns More Than 1% Of (LDR)
Virtus Investment Partners Owns More Than 1% Of (NRCI)
Virtus Investment Partners Owns More Than 1% Of (DBV)
Virtus Investment Partners Owns More Than 1% Of (XLB)
Virtus Investment Partners Owns More Than 1% Of (XLV)
Virtus Investment Partners Owns More Than 1% Of (XLP)
Virtus Investment Partners Owns More Than 1% Of (XLY)
Virtus Investment Partners Owns More Than 1% Of (XLE)
Virtus Investment Partners Owns More Than 1% Of (XLF)
Virtus Investment Partners Owns More Than 1% Of (XLI)
Virtus Investment Partners Owns More Than 1% Of (XLK)
Virtus Investment Partners Owns More Than 1% Of (XLU)
Virtus Investment Partners Owns More Than 1% Of (SUBK)
Virtus Investment Partners Owns More Than 1% Of (WDFC)
Virtus Investment Partners Owns More Than 1% Of (YDNT)
Virtus Investment Partners Owns More Than 1% Of DOMINO'S PIZZA UK & URL PLC
Virtus Investment Partners Owns More Than 1% Of (DRYS)

MIke Khouw
*No Disclosures

Joe LaVorgna
* No Disclosures