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Basic Materials


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In Buzz & Banter, Greg mentioned the breakout in basic materials. While he was referencing an exchange-traded fund, the Rydex fund family also has an offering that tracks the group.

The good folks at Rydex have been smart enough to release the asset levels of their funds, something that allows us good insight into the real-money behavior of the traders who use them. The chart below shows the amount of assets that have been invested in their Basic Materials fund over the past couple of years.

Note the huge spike in the waning months of 2003, as traders gained recognition of the group and invested heavily. Not surprisingly, that point of recognition also marked the peak in the sector for the next few months.

Currently, assets are languishing around $45 million, well below the speculative peak and even below most of 2004's levels, despite the good performance of the group. This type of apathy has been good tip-offs to further price rises in sectors like Banking and Energy over the past several months.

One measure of investor sentiment is surely not enough to be able to definitively say that investors are too optimistic or pessimistic on an entire sector, but the contrary nature of the Rydex funds has had a consistently successful track record at showing us just that.

With these funds, it's easier to note the speculative optimism that normally accompanies price peaks, but I thought the breakout in the group combined with the apathetic level of assets in the Rydex fund was a point to mention.

No positions in stocks mentioned.

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