The most profitable trades of 2017 are suddenly not working. Managers who made a killing selling volatility over the past five years woke up to the harsh reality that no strategy works forever, and that selling volatility in a late-cycle economy can be a recipe for disaster. The carnage was most evident in the sudden closing of an exchange-traded note, XIV, after losing almost 100% of its value overnight. But make no mistake, it was not only retail that got hurt during the February volatility spike — there are a plethora of hedge fund managers licking their wounds. When a single day of market action can wipe out years of collected premium, you know you are in a crowded trade. Remember, being “short” anything exposes investors to unlimited risk, and those that believe they can trade out of a losing investment, often overestimate the liquidity that exists when investors rush for the exits. Case in point – XIV collapsed 80% after hours on light volume.

Meanwhile, technology bell-weathers, the so-called FANG stocks are losing their leadership. Market pundits are quick to blame security issues at Facebook and potential governmental regulation for the likes of Amazon and Google for the most recent weakness. But these are only catalysts for the sell-off. All of these bell-weather tech names are overly-crowded – a function of unprecedented liquidity and the passive investing movement that has continually funneled money to the largest and most prodigious stocks. Headlines don’t matter in a bull market, as “all news is good news.” When stocks finally react to negative headlines, it is usually because of crowded positioning. Simply put, there is just nobody left to buy.

Tesla, another stock with a cult-following erased its 2017 gains in a matter of weeks. Mr. Market has finally realized that any company with CCC-rated debt, an unprecedented cash burn, and negative earnings since it’s IPO, probably should not have a $50 Billion market-cap. Again, if it worked in 2017, it’s not working now

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