“End-month, New-month” pattern
Wednesday, February 25th, 2004 8:30pm EST
Semi-Bullish
Bottom Line: Rydex traders in the Electronics fund are as pessimistic now as they have been at any other time during the past year.
We watch asset movements in the Rydex family of mutual funds very carefully. The behavior of these traders has been an excellent tip-off of overheated sentiment conditions (both ways). Normally, I touch on only the activity in the index funds which track the S&P 500 and Nasdaq 100, since those are where most of the assets are concentrated. However, Rydex also offers about 20 other funds which track various concentrated segments, such as small-cap stocks, health care, financials, etc. One of the more interesting – and active – funds is the Electronics fund, which obviously follows obviously electronics-related stocks. A large component of the concentration is semiconductors. In fact, if you plot the Electronics fund next to SMH (the Semiconductor HOLDR) or the SOX index, they are almost identical. Watching how the assets flow into and out of this Rydex fund can give us a clue as to how Rydex traders are committing their capital to that particular important segment of the market.
My preferred method of looking at this data is to divide the asset level of the fund by the Net Asset Value (NAV) of the fund itself. This isn’t entirely necessary, but to me it is easier imagining the amount of money that is in the fund relative to its price. For example, as of yesterday there was $55.2 million invested in the Electronics fund. The NAV of the fund was $13.73, so there was just over $4 in assets per point of NAV. This is quite a change from a few weeks ago, when there was over $8 in assets per point of NAV.
The chart below shows the NAV-adjusted assets in the fund, along with arrows showing the relative extremes since March of last year.
As of yesterday, there were fewer assets in the fund (per point of NAV) than at any time since March. Each of the other times the asset level reached such a low level, the average semiconductor stock performed very well over the next few days. In fact, after 3, 5 and 10 days, the SOX was higher every time the indicator dipped below 4.5, with average gains of 6.7%, 9.1% and 12.9% respectively.
The SOX already rallied 1.8% today, but according to the history of this indicator over the past year, there should be more to go if the uptrend is still firmly intact. The price structure is already a bit different from what we’ve seen previously, and a drop below the 39 level on SMH would confirm a downtrend, so this index is at an important juncture. Its impact on the broader market is debatable, but I believe it’s worth watching.
Approaching A Good Time of Month
Bottom Line: The next five days have been consistently positive for the S&P 500 since 1950.
Near the beginning of every month, I have been posting the historical performance of the S&P 500 during that month. These have been quite good guides, as the last few months have conformed pretty closely to their historical patterns. I am not going to post the chart for March, since you can now find the chart for every month (along with all of the underlying data) in the Seasonality section of the site (click here for the page of monthly charts).
We are now entering a consistently positive time of the month. The last two trading days in February and the first three trading days in March have been positive an average of 63% of the time since 1950. If you had started with $10,000 in 1950, and invested only during those five days of the year, you would have ended up with $13,952 by 2003. This is a gain of nearly 40% by being invested for only 270 days out of 54 years, which is roughly equivalent to a yearly return of 37%, all with a maximum drawdown (loss) of just over 5%. That’s not too shabby.
Of course, this does not work every year (witness the 1960’s), but it is certainly a consistent enough pattern that I think you should be aware of it. This in itself does not preclude me from going short over the next week, nor does it make me want to buy blindly, but I am more interested in looking for long setups than short because of this phenomenon.
Conclusion
Nothing has changed since the last comment. The broader market has held tough, and refuses to give up much ground (or make much headway). This is fine, as long as it does not decline further. I continue to prefer looking on the long side of the market, but a break of this week’s lows will put that strategy in serious jeopardy. While I am not at all impressed with the market’s inability to rally from the oversold conditions we saw over the past couple of days, the fact that it at least stopped going down has to be considered positive given the larger uptrend currently in place.
Jason Goepfert
President and CEO
Sundial Capital Research, Inc.
Disclosure: no positions
This disclosure is not intended as trading advice in any form. It is meant as a note to subscribers that the author may have a position directly affected by the market outlook reflected in the commentary. Although the author takes great pains to remain objective in any commentaries, it is only fair that readers should know that the author may have taken positions in accordance with his market outlook. Positions can and do change at any time, without notice to the reader.
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