The five trades that most people have gotten wrong

Trump rally back on as Dow takes run at 20K

Stocks may be setting new records, but many investors have gotten burned by being on the wrong side of overcrowded trades.

The Dow industrials burst to a quick 7.6 percent gain following President Donald Trump's victory in the November election. However, the market has traded essentially flat since then.

Part of the reason was what some market watchers call a simple "reversion to the mean," a reference to market conditions generally returning to longer-term norms over time. Sectors that got ahead of themselves in November and December are falling prey to gravity.

Since the new year, companies that performed best between Election Day and the end of 2016 are the worst performers in 2017, with a 0.02 percent drop heading into this week, according to Bespoke Investment Group. Conversely, the stocks that performed worst from the election to Dec. 31 have been the best so far this year, with a 4.6 percent gain.

"What's happening right now is people are just really digesting how much the economic impact the policies are going to have," said Michael Yoshikami, CEO of Destination Wealth Management. "The market got overly enthusiastic."

The market performance is in good measure due to five trades that quickly became overcrowded:

Short Trump

Pretty much everyone on Wall Street got this one wrong, with most forecasters seeing a 5- to 10-percent drop if Donald Trump won the presidency. Of course, everyone also knows what happened next: A rapid 7.6-percent surge in the Dow that did, however, flatten out for a month.

Now, with the Dow threatening to eclipse 20,000, the rally looks like it's back on. The biggest loser so far appears to be billionaire and progressive activist George Soros, who has lost upwards of $1 billion in anti-Trump trades since the election.

Long dollar

Everyone thought a pro-growth Trump agenda combined with a hawkish Fed would push the U.S. currency well above its competitors around the world. However, market pros responding to the most recent Bank of America Merrill Lynch Fund Managers Survey called the long-dollar position the "most crowded trade by a country mile." The upshot from this year's performance: The greenback is off more than 3 percent against a basket of its global peers since peaking during the first run of the Trump rally.

Short bonds

Trump's policies would drive growth, which would push inflation higher, which would kill bonds. Right? Well, all those investors who jumped into short positions on government bonds to around record levels haven't fared so well in 2017.

Investors have poured $364 million into The iShares Short Treasury Bond exchange-traded fund — the second-highest inflow to any fixed income ETF this year — but have gotten nothing for their money. The fund, which bets against government debt of one year or less, is flat for 2017. Meanwhile, the iShares 20+ Year Treasury Bond ETF has gained 1 percent this year and is up 2.6 percent over the past 30 days.

Long banks

Michael Nagle | Bloomberg | Getty Images

Financial stocks were going to be the big winner of 2017, thanks to higher rates, a steeper yield curve and less regulation. And the banks may still be a good bet in the long run, but in the short term they've turned into a rough trade.

Despite showing collective profit gains of 10.5 percent in the fourth quarter, earnings season has seen bank shares fall. The KBW Nasdaq Bank Index is off narrowly year to date and 1.7 percent over the past month. Analyst Dick Bove, while bullish long-term, has been warning about investors getting over their skis on the industry. Recent trading indicates that the sector is in for at least some consolidation after surging nearly 25 percent after the election.

Short health care

Sure, the sector has taken a beating the past several trading sessions. But predictions of doom-and-gloom as the repeal of Obamacare looms have proven unfounded. Even with the sell-off over the past week, the Health Care Select Sector SPDR fund is still up narrowly for the year. Yet over the past week, investors have pulled $185.4 million from the fund, according to FactSet. Some big-money fund managers at Fidelity, Gamco, Thornburg and others have staked out positions across the sector in recent days, according to Reuters. One of the year's big projected losers could turn into a winner if they're right.

As for the broader market, it's still searching for direction. Tuesday's rally gave the a gain approaching 2 percent for the year, but the market has retreated every time it's gotten around this level.

"A month ago this was not a very popular perspective, but I just don't think things are going be as extreme from a policy standpoint as people are thinking," Yoshikami said, "That's why I think markets are in a trading range."