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Last week we looked at the beaten down energy sector through the large integrated oil companies. While they had fallen much more than the general stock market, they had also staged a much stronger recovery since the beginning of the month.
But today they lead the market lower again. As market proxies like the Dow Jones and the S&P 500 index fell by about 1.5%, the energy sector dropped twice as hard. To get a sense of the retail investor sentiment towards these shares, I decided to turn to the pattern of Rydex traders.
These are market timing traders who are quick to jump on and off hot or cold sectors. Since they usually react emotionally, piling on to chase performance or selling fearing further losses, they are usually a good contrarian measure. Here is a chart comparing the Rydex Energy Services fund with its NAV:
This sector fund shrank from more than $200 million in assets in June 2008 to less than $30 million. So there is no question that it is out of favor with Rydex market timers. But while they have abandoned energy services stocks, they never really came back into this sector after it bottomed out in late 2008 and early 2009.
As you can see from previous patterns, when assets fall sharply in answer to lower market prices, we usually see a significant low formed. But the most recent pattern doesn’t correspond to this. We have seen prices drop but there has been no concomitant asset shrinkage that we can point to.
There are two spikes in assets as Rydex investors rushed in and then - just as quickly - out throughout the cyclical bull market that started in March 2009. That makes me cautious about interpreting the low level of assets as a contrarian buy signal. If we had seen assets at around $200 million at the recent top in April and then a drop to these levels that would make me much more optimistic that we had seen a washout of weak hands. However, since we didn’t really see euphoria, it is difficult to say now that this level corresponds with despondency.
Here are the top ten holdings (as of May 28th 2010) of the fund, comprising approximately 50% of the assets:
- SCHLUMBERGER (SLB)
- BAKER HUGHES (BHI)
- HALLIBURTON (HAL)
- NATIONAL-OILWELL VARCO (NOV)
- WEATHERFORD (WFT)
- SMITH INTERNATIONAL (SII)
- CAMERON (CAM)
- DIAMOND OFFSHORE DRILLING (DO)
- FMC TECHNOLOGIES (FTI)
- TRANSOCEAN (RIG)
As a final note, keep in mind that the bullish percent index for the S&P Energy Sector didn’t fall to the extreme low levels that usually have corresponded with intermediate bottoms. In late May the Energy Sector Bullish Percent index fell to just 25%, shy of 20% or lower that we normally see it fall to. For example, in March 2009 it was just 4.4%! And now with the short term bounce in the oil stocks, the bullish percent index is back up to 54%.
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