There has been quite a bit of attention on gold lately, with both those bullish and bearish on the metal providing compelling reasons why the other is wrong. Gold isn't really my bag, but I thought I would point out something interesting that has proven effective in the past.
I have mentioned before that I monitor asset flows in the Rydex mutual fund complex. As the market, or individual sectors, gain and lose favor, so do the funds based on those sectors gain and lose assets, respectively. Currently, the Rydex Precious Metals fund is showing the type of momentum in its assets that has preceded intermediate-term highs in some of the underlying stocks.
The following chart shows the asset level of the Precious Metals fund, framed by its 200-day Bollinger Bands (a measure of volatility). When assets reach the upper band (in red), then we know that the Rydex timers are shifting money into that fund to an extent that could be considered extreme, hoping to ride the trend for more upside. Not surprisingly, more upside is rarely seen. Conversely, when traders are so sick of gold issues that they pull money out of the Precious Metals fund to such an extent that the assets approach the lower band (in green), then those stocks have consistently regained some luster.
Last night, we saw the largest one-day shift of money into the Precious Metals fund in over three years. This could be some type of professional money moving into the fund, but we have no way of knowing that. Instead, we can only interpret it the way that has worked in the past. In that regard, the current move into the fund is extreme (it's poking above its upper band), and that has spelled trouble for stocks in the Amex Gold Bugs Index the last few times this has happened. It's a dangerous sport to try to pick the top of such markets, especially as they hit new highs, but this may add just a pinch of caution to those looking to move aggressively into gold stocks.
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