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Are Traders Becoming a Bit Too Speculative?


Rising speculation coming out of an oversold market is a good thing, since it keeps people buying and prices rising. But at some point it becomes too much...


Whenever one sector or asset class greatly out-performs others, it tends to generate a lot of interest among traders – we all want to be involved in what's working now.

Tech has been an obvious out-performer of late, and predictably that has sparked interest among those looking to put money to work. More specifically, the internet group has been very hot, so we're starting to see money flowing there. And it might be overdone.

The reason is because money flowing into the group seems like it has crossed the line into "too much, too fast". One way to see that is to look at the assets going into the Rydex mutual funds.

That fund family has the Rydex Internet Fund (RYICX) available for its investors, and they release the asset levels in the fund daily. I've plotted the past few years of those assets against the NAV of the fund below.

Click to enlarge

We can see that currently the fund has nearly $60 million in assets. That's peanuts compared to the market value of the sector, but we're operating on the idea that Rydex traders are a proxy for a broader population of traders, behaving in a similar manner, and I think that's a sound theory.
What has piqued my interest here is that over the past seven years, whenever assets in the fund have reached the $50 million mark, it has been an apparent indication that traders in general have become overly enamored with the sector's prospects. The go-forward returns in the sector have been sub-par (to put it kindly) when we've seen this kind of activity.
The three-month forward return in Amazon (AMZN) was -8.3% with 2 of 8 occurrences showing a positive return. In eBay (EBAY), it was +1.0%, but with only 3 of 8 positive. For Yahoo (YHOO), the future three-month return was a dismal -8.9% with only 1 of 8 positive.
Even some of the tech giants that aren't so glued to the internet specifically didn't fare so well. Microsoft (MSFT) averaged -5.7% with 1 of 8 positive, Intel (INTC) was -9.3% with 1 of 8, and Apple (AAPL) was -5.1% with 1 of 8 positive as well.
Rising speculation coming out of an oversold market is a good thing, since it keeps people buying and prices rising. But at some point it becomes too much, and prices are more likely to either decline as that speculation ebbs, or go into a much more choppy environment – kind of a two steps forward, one step back kind of thing. I think we're quickly approaching that point.
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No positions in stocks mentioned.

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