We last looked at this sector earlier this year in the summer: Rydex Sentiment For The Energy Services Sector. At the time I was questioning whether we were seeing enough pessimism to provide us with a significant low.
Perhaps my mistake back then in doubting the amount of despondency was to expect the assets to have dropped further when they were already near (historical) rock bottom.
Much has changed since June 2010. The energy services sector did indeed rally. Using the Oil Service HOLDRs ETF (OIH) as a proxy for the sector, the performance since late June has been +32.5%. But now, the Rydex sentiment for the sector is very close to the other extreme:
As the above chart shows, a sudden surge in assets arrives concomitantly with impressive performance. However, it is usually then followed by either a consolidation or correction. Right now the total assets of the Rydex Energy Services Fund are $188.5 million. Assets have certainly been higher than this historically but what interests me more is the sharp jump in recent weeks.
To illustrate what I mean, consider the top formed in early July 2008. The total assets in the Rydex Energy Services Fund were much higher at their peak back then: $275 million. But you have to keep in mind that the low of the assets was formed in February 2008 with appx. $125 million. So there was a sharp jump in total assets of $150 million.
This is similar to the recent pattern in the fund’s total assets. In July 2010 the assets of the fund were only $47 million as skittish investors voted with their wallet and left the sector. So the current jump is approximately a $141.5 million increase in assets, very close to what we saw in July of 2008.
Of course, this sector isn’t the only one to be overbought right now. With the market feeling top heavy, many sectors are demonstrating a similar characteristic. Right now I’m concentrating on the sectors that are truly in thin air territory because when or if the market does top out, they will fall even more.