Short-term Outlook (1-5 Days):  Neutral  From Apr 23, 1215 SPX

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Equity Indicators - Updates and Extremes

Over-The-Counter Trading Volumes

During March and early April, we went over a number of different reasons why the evidence was pointing to too much speculative activity and any further upside gains were likely to be limited (just go to the April 15th comment and scroll down to the List Of Extremes near the bottom of the report).

That's not to suggest that everything was pointing that way, however - we never get 100% agreement among all the indicators.  The absence of huge flows into equity mutual funds is one of them (though that can relatively easily be explained away), but another more compelling one is the lack of truly speculative activity in the Over-The-Counter market.

This is where penny stocks trade - those companies that are so shaky, they don't meet the listing requirements of the major stock exchanges.  It's where the gamblers migrate most often when they want to roll the dice, and when we see volume in those stocks spike higher, a correction almost inevitably follows.

We hadn't been seeing that during the past year, though.  These guys (and they are mostly guys) were pretty much staying away despite huge potential gains.  Let's see if that's changed at all:

Well, not really.  There was about a 20% jump in volume (however we define it) in April from March, and around a 50% increase just from February.  That's nearing the upper limit of what we normally see when speculation is overheating.

But the data isn't yet convincing, either on an absolute basis (see the peaks in the chart above) or on a rate-of-change basis, that we're seeing excessive amounts of gambling in these lottery-ticket stocks.  We're certainly seeing some of the most enthusiasm there since the March 2009 low, but given the price rise that's understandable.

Dollar Volume and Transaction Volume would have to increase about another 50% or so before I'd become overly concerned that this data point was fitting with the others and suggesting too much speculative activity.

Rydex Sector Assets

Usually once a month, we overview the Rydex sector funds to see where the traders in that mutual fund family are concentrating their assets.

Over the past few months, there really hasn't been much of a change.  Health Care and Consumer Products were dominating the assets, with more than 30% of the total between them.  Precious Metals had dwindled down to about 13% of total assets from its high of more than 30% last December, and Financials were bringing up the rear like always.

That has changed significantly.

Traders have almost completely pulled out of the previous leaders, with Health Care and Consumer Products together accounting for only 9% of assets.  That's a huge change from what we've been seeing for months.

Conversely, Precious Metals has staged a comeback.  The fund has attracted about 33% more assets than it had in February, and its share of the total sector funds has jumped from barely 12% (a multi-year low) to nearly 20% as of yesterday.

Prior to 2009, when those assets hit 20% of the total, the Precious Metals fund was about to top out more often than not.  During 2009, however, the fund reached the 30% level a few times, which were good at giving a heads-up to imminent short-term pullbacks.  Because its recent ascent up the sector ladder is due more to money leaving other funds rather than money being heaved into Precious Metals, I'm not too concerned that sentiment has become overly enthusiastic just yet.

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