Wall Street's hot trading collective "crashes"! The first lesson the 2026 market gives to investors: Just how dangerous can crowded trades be?

In a market atmosphere where investors flock and individual traders propel the market, this week's market performance fully demonstrated how market beliefs can evaporate at what speed. As popular trading instruments collectively weakened, trillions of dollars swiftly shifted within the market, leaving virtually no room for error in highly concentrated positions. Precious metals market was hit the hardest. Gold suffered its most severe decline in decades, while silver saw record-breaking drops. Other popular strategies also showed instability - including bearish bets on the US dollar, betting on non-US stocks, and trading in artificial intelligence (AI) concepts. While the volatility in precious metals was the core theme of this week's market, it conveyed a more profound signal: When trading strategies become market consensus, even small changes can trigger unexpected and drastic fluctuations. Well before the price crash, signs of market crowding were evident. Bank of America Corp's fund manager survey in January showed that being bullish on gold was considered the most crowded trade in the global market. The sustained frenzy demand once pushed gold prices above the long-term trend line by more than 44%, reaching premium levels not seen since 1980. Keith Lerner, Chief Market Strategist at Truist Advisory Services, bluntly stated, "Market consensus is always right - unless it becomes extreme." This week, the limits of this market consensus were put to the test. On Friday, the US dollar index saw its largest single-day gain since May, hitting US dollar bears hard; the relative performance of emerging market stocks compared to US stocks also recorded its worst single-day performance since May. Market cracks were already visible on Thursday morning - gold and silver prices experienced a more than 7% plunge in just 30 minutes, with a slight rebound, but the downtrend was established. On Friday, US President Trump nominated Kevin Warsh as the next Federal Reserve Chairman, further accelerating market sell-offs. This anticipated personnel appointment (Warsh had been a hot market candidate in recent days) accelerated the existing trend. This traditional hawkish figure recently shifted to a dovish stance, adding variability to the Fed's policy path and shaking the market's expectations for a clear dovish outcome. This uncertainty propelled the US dollar further, weakening the "currency depreciation trade" logic that had been driving the metals' rally. In a normal market environment, these factors combined might only cause a mild pullback. However, in the current market, investors' positions are highly aligned, and leverage levels are accumulating covertly - just these factors are enough to trigger a substantial single-day decline: gold plummeted over 9%, silver crashed by about 27%. Emily Roland, Co-Chief Investment Strategist at Manulife John Hancock Investments, said, "Any asset that rises parabolically often falls in the same manner. This steep decline in precious metals is largely driven by market momentum, technical trading, and emotions." This one-way betting phenomenon is visible in various markets. Renaissance Macro Research cites data from Consensus Inc., which shows that the silver sentiment index, compiled based on weekly sentiment surveys of financial strategists and financial newsletter writers, has surged to its highest level since 1998. Before Friday, the US dollar saw its worst annual start in eight years, while the MSCI Emerging Markets Index outperformed the S&P 500 to its highest extent since 2022. This phenomenon once again reminds the market: even though the overall bull market trend remains resilient, the consistency of investors' positions behind it has reached extremely high levels. This week's precious metals crash also exposed other crowded trades in the spotlight - from the favored small-cap stocks to trades persistently betting on lower market volatility and steeper yield curves. On Wednesday, Microsoft Corporation (MSFT.US) reported record AI-related spending, but its core cloud business growth showed a slowdown, once again raising concerns in the market: the massive investments by tech giants may take longer to actual returns. The market reacted swiftly, with Microsoft Corporation's stock price falling, prompting investors to reassess the previous widespread assumption of "high investment will consolidate US tech dominance". The previous week, tensions in US-Europe relations had caused market turmoil, briefly interrupting the New Year's rally, but then various assets rebounded almost simultaneously. This week, the S&P 500 index ended a two-week decline, recording its first weekly gain in three weeks, and even briefly surpassed the 7000-point mark. Behind the market's flurry, a more thought-provoking question is gradually emerging: in this momentum-driven market, is there still room for contrarian investors to survive? What is the cost of going against the tide before the market consensus turns? Rich Weiss, Chief Investment Officer of Multi-Asset Strategies at American Century Investments, was one of the contrarian investors who started positioning against the trend at the end of last year. He began increasing holdings in US stocks and reducing overseas assets in his portfolio, however, with the surge in non-US assets, this move has not yet paid off. But he remains firm in his belief that continued profit growth for companies will help US companies continue to outperform foreign competitors. Weiss said, "Although the current market trend contradicts our positioning, the fundamentals are moving in a direction that favors us. Chasing market momentum is like picking up coins in front of a steamroller - it may seem feasible until a crisis hits." While the market volatility on Friday has not completely ended various popular trades, some investors have begun to contemplate whether this is an early warning signal to exit. Jeff Muhlenkamp has been closely tracking the gold rally, with his $270 million fund generating returns of nearly 10% so far this year. He said that while the major drop in gold prices is not good news, leaving the market too early now might mean missing out on potential gains if gold prices rebound in the future. He added, "I must now ask myself a question: How much further can gold prices fall? At the moment, I do not have an answer."