How bullish is the Dow’s new all-time high?
With
the Dow Jones Industrial Average flirting with a new all-time high, it
shouldn’t be a surprise that many traders, analysts and journalists have
that as a major topic of discussion.
In
order to determine if it actually means anything going forward, we can test
what has happened in the past when the Dow hit new multi-year highs (here’s
a hint: it tended to slightly under-perform a random return up to a month
later), or we can take a look at sentiment towards other
large-capitalization stocks.
What
people say and what people do are sometimes two different things, so just
because we’re hearing a lot about how bullish a new all-time high might be,
it doesn’t necessarily mean that traders are positioned that way.
One
way of monitoring the real-money position of traders is via the Rydex mutual
fund family. Rydex offers dozens of funds that concentrate on certain
sectors, styles or capitalization sizes.
In
the chart below, we can see a plot of the DJIA against the amount of assets
invested in the Rydex Large Cap Growth fund and the Rydex Large Cap Value
fund. While Rydex offers funds that specifically key off the Dow, I thought
it would be interesting to look at assets in the pure large-cap funds versus
the world’s most famous equity index.
On
Monday, assets in the Large Cap Growth fund jumped by 10% and are now at one
of the highest levels since the funds’ inception in 2004. Assets in the
Large Cap Value fund didn’t move much, but they’re still hovering around
their highs. Taken together, assets in the funds are at a new all-time high
– showing that traders are putting their money where there mouths are and
betting on a continued rally in large-cap land.
Rydex also offers funds that concentrate on small-cap growth and value, and
mid-cap growth and value. One of the charts that we keep daily shows the
percentage of total “size and style†assets that are concentrated in small-
mid- and large-caps, and right now nearly 70% of those assets are focused on
large-caps. Small-caps have about 20% of the assets and mid-caps a lowly
10%.
Typically when we see these kinds of extremes, we soon see a rotation into
other cap sizes or styles. So with all the hoopla over the Dow, and the way
Rydex traders are currently positioned, it doesn’t seem far-fetched that
we’ll soon see at least a temporary rotation away from large-cap growth — at
least until the clamor settles down.
Jason Goepfert
Jason
Goepfert is the founder of Sundial Capital Research, Inc. and Editor of
sentimenTrader.com,
a leading website for the unique and practical application of behavioral
trading to the stock and bond markets. The site has subscribers in all 50
states and more than 50 foreign countries, including individual investors,
portfolio managers and market strategists, and has been widely cited in
international financial media.