regimenia

Global performance

2008-07-20T08:46:00.000-07:00

S&P 500, EAFE, & Emerging Markets - 5 year performance (above).

S&P 500, EAFE, & Emerging Markets - bear market performance (above).

Typically there's a trade-off between performance and volatility, but this bear market has shown there was little benefit shifting assets from EAFE or Emerging Markets to the less volatile S&P 500. I would have thought the EAFE and Emerging Market equities would have taken a much larger hit over this period.

The question in my mind is; will foriegn equities continue to outperform the U.S. in the next bull market?

Week of 7-19-2008

2008-07-19T12:56:00.000-07:00

Timing Model = 0.5
60% long, 40% cash

Global allocation of long positions
MSCI EAFE Index 30%
MCCI Emerging Markets Index 20%
Russell 3000 Index - U.S. 50%

Top U.S. Sectors
U.S. Biotechnology 4.5
U.S. Oil Equipment, Services & Distribution 4.0
Precious Metals 3.5
U.S. Oil & Gas 3.0
U.S. Health Care 2.5
Small Cap Growth 2.5
U.S. Leisure Goods 2.0

Top Intl. ETFs
MSCI Canada Index Fund 2
S&P Latin America 40 Index Fund 2
MSCI Brazil Index Fund 2
MSCI Mexico Index Fund 1
FTSE/Xinhua China 25 Index Fund 1

Strategy 3
Money Market 33.3%
Agriculture 33.3%
Precious Metals 33.3%
U.S. Long Bonds 0.0%
Energy 0.0%Industrial Materials 0.0%
Emerging Markets 0.0%
U.S. REITs 0.0%
U.S. Small Cap 0.0%
U.S. Large Cap 0.0%
Intl Real Estate 0.0%
EAFE 0.0%

Week of 7-12-2008

2008-07-12T13:46:00.000-07:00

Timing Model = -0.5
40% long, 60% cash

Global allocation of long positions
MSCI EAFE Index 30%
MCCI Emerging Markets Index 20%
Russell 3000 Index - U.S. 50%

Top U.S. Sectors
U.S. Biotechnology 5.0
U.S. Oil Equipment, Services & Distribution 5.0
U.S. Oil & Gas 4.0
U.S. Health Care 3.0
Precious Metals 3.0
U.S. Basic Materials 2.5

Top Intl. ETFs
MSCI Canada Index Fund 3
S&P Latin America 40 Index Fund 2
MSCI Brazil Index Fund 2

Strategy 3
U.S. Long Bonds 20.0%
Money Market 20.0%
Agriculture 20.0%
Energy 20.0%
Precious Metals 20.0%
Industrial Materials 0.0%
Emerging Markets 0.0%
U.S. REITs 0.0%
U.S. Small Cap 0.0%
U.S. Large Cap 0.0%
Intl Real Estate 0.0%
EAFE 0.0%

My timing model continues to suggest increasing less risk in equities - now at 40% long, 60% cash. I don't see a lot of sector rotation lately. Biotech is on a tear and Healthcare has been stuck in a 6% range for the past 4 months, but energy, precious metals, and basic materials are still momentum leaders.

SentimenTrader fanboy

2008-07-11T19:21:00.001-07:00

Reading Jason Goepfert's daily comments today made me once again appreciate what a awesome service he provides his subscribers. Almost every post is rich in quantitative analysis, including a historical study or two relevant to today's market conditions. His comments and analysis is always calm, rational, and based on non-data-mined market precedent.

It also blows me away how freakin busy Goephert must be - you can tell he's extremelyh passionate about the markets and his site is a gianorimic dashboard of sentiment indicators.

I only subscribe to a couple services/publications, but sentmentrader.com is the one I truly value.

note - I recieve no financial benefits or discounts from either Sentimentrader.com or Jason Goepfert.

Oscillator funfest

2008-07-07T19:28:00.000-07:00

If you're a counter-trend trader, you're probably scanning for a long set-up somewhere in equities. The S&P 500 chart above shows three popular oscillators and illustrates the aftermath of oversold conditions during the past three years. As you can see, buying at oversold junctures during the bull market was a profitable tactic. As we moved into the '07-'08 bear market, gains were usually short-lived. Even so, an oversold condition that is reversing usually signals risk is minimal, at least for the short term.

All three oscillators are currently locked and loaded for buy signals.

Week of 7-06-2008

2008-07-06T18:21:00.000-07:00

Timing Model = -1.0
30% long, 70% cash

Global allocation of long positions
MSCI EAFE Index 30%
MCCI Emerging Markets Index 20%
Russell 3000 Index - U.S. 50%

Top U.S. Sectors
U.S. Biotechnology 5.5
U.S. Oil Equipment, Services & Distribution 5.0
U.S. Oil & Gas 4.0
U.S. Health Care 3.5
U.S. Utilities 3.0
Precious Metals 3.0
U.S. Technology 2.5
U.S. Consumer Services 2.0

Top Intl. ETFs
MSCI Canada Index Fund 3
S&P Latin America 40 Index Fund 2
MSCI Brazil Index Fund 2
MSCI Mexico Index Fund 1

Strategy 3
U.S. Long Bonds 20.0%
Money Market 20.0%
Agriculture 20.0%
Energy 20.0%
Precious Metals 20.0%
Industrial Materials 0.0%
Emerging Markets 0.0%
U.S. REITs 0.0%
U.S. Small Cap 0.0%
U.S. Large Cap 0.0%
Intl Real Estate 0.0%
EAFE 0.0%

Week of 6-29-2008

2008-06-29T10:02:00.000-07:00

Timing Model = -1.5
20% long, 80% cash

Global allocation of long positions
MSCI EAFE Index 20%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 50%

Top U.S. Sectors
U.S. Biotechnology 5.5
U.S. Oil Equipment, Services & Distribution 5.0
U.S. Oil & Gas 3.5
Precious Metals 3.0
U.S. Utilities 3.0
Small Cap Growth 2.0
U.S. Basic Materials 2.0
U.S. Health Care 2.0

Top Intl. ETFs
S&P Latin America 40 Index Fund 3
MSCI Canada Index Fund 3
MSCI Brazil Index Fund 3
MSCI Emerging Markets Index Fund 1

Strategy 3
U.S. Long Bonds 16.7%
Money Market 16.7%
Agriculture 16.7%
Industrial Materials 16.7%
Energy 16.7%
Precious Metals 16.7%
Emerging Markets 0.0%
U.S. REITs 0.0%
U.S. Small Cap 0.0%
U.S. Large Cap 0.0%
Intl Real Estate 0.0%
EAFE 0.0%

A patient model

2008-06-26T18:07:00.000-07:00

My gut reaction to periods like this is usually a lot more bullish than my model suggest. We're six weeks into steadily falling prices and sentiment is growing more pessimistic every day. but my model is patient.

By design, my model's sentiment indicators gradually counter trend indicators at market bottoms. A pure trend-following system would always be wrong at tops and bottoms, only to suggest shifts in long/short positions after prices have made significant moves.

As you can see in the screenshot of my model, all four trend indicators are currently at a -1. The sentiment indicators are only slightly bullish, most at a +.5. I score each sentiment indicator slightly different, but the basic principle is:

If sentiment is exhibiting excessive pessimism but falling, score it mildly bullish
If sentiment is at historical extremes, score it bullish

If sentiment is excessively pessimistic, but has reversed, begining to show greater optimism, score it as extremely bullish

In my model, trend and sentiment counterbalance each other - yin yang if you will. Usually the sentiment indicators only start to exert bullish weight when the market is growing closer to a market top or bottom. If sentiment reverses, their weighting increases dramatically.

Note the week ending 3/28, where the sentiment indicators went into hyperdrive, overpowering the unanimously bearish trend indicators to push the model to a 70% equity allocation. If you recall that period, most pundits were waiting for the other shoe to drop. Models that include a strong sentiment components can very often get your long/cash allocation right at important turning points.

Below is a chart of my timing model's equity allocation for 2008 vs. the S&P 500.

20 questions for Barack Obama

2008-06-21T19:58:00.000-07:00

Here are 20 questions the mainstream media will never ask Barack Obama.

1.What is the role of government?

2. Are you a capitalist? Why do you think capitalism is a good or bad system?

3. Do you agree or disagree with this idea: “From each according to his ability, to each according to his need”? Explain?

4. Which of these are “rights” of Americans: Healthcare? Housing? Education? Food? A Job? Transportation? Clothing?

5. How large should the Federal government be? In percentage of GDP? In dollars? In number of employees as a percent of the population?

6. How quickly should Federal spending grow each year?

7. Which do you feel best describes the current situation; 1) Federal revenues have been too low and government should be spending more or 2) Federal revenues are adequate and the government should be spending less?

8. JFK gave a famous speech in 1961 and said “ask not what your country can do for you - ask what you can do for your country.“ Do you believe too many of your constituents are asking for a handout from government? Do you believe your campaign has fueled the idea that the government owes Americans a lot more in services, subsidies and direct payments?

9. Do you believe large marginal tax increases will have any negative effects on economic growth or productivity?

10. At what income level will working Americans see a payroll tax increase under your plan? At what income level will Americans see an income tax increase under your plan?

11. Can you name some things companies do when their taxes are increased? Raise prices? Cut wages? Cut benefits? Reduce expenditures on R&D and capital investment?

12. What impact will a capital gains tax increase will have on investment and the economy?

13. Do you believe the oil industry is out to screw Americans? What about Google? Coca-Cola?

14. Why don’t rich liberals give away a lot more of their money? As a rich person yourself, do you believe you’re giving away as much as you should?

15. Public sector or private sector. Which is more creative? Effective? Efficient? Productive?

16. Your wife told a group of young people "don't go into corporate America," she urged them to become social workers or others in "the helping industry," not "the moneymaking industry." Given that the moneymakers pay for 100 percent of American jobs, in both public and private sectors, is it not helpful? (hat tip George Will)

17. Would you rather see a gallon of gasoline at 50 cents or 4 dollars?

18. African American society has crumbled over the past 40 years (higher jobless rates, higher incarceration rates, higher rates of out-of wedlock-children, higher drop out rate, etc.). Explain what you think has happened? Do you believe the great society programs that began in the 1960s played any role?

19. Did you know there are 31,072 scientists who have signed a petition stating that there is no convincing evidence of greenhouse gasses causing global warming? (9,000 of them are Ph.D's). Have you spent any time reading their arguments? Please explain why you think they’re wrong.

20. If elected President, how may more U.S. troops will you send to Afghanistan?

Week of 6-21-2008

2008-06-21T12:49:00.000-07:00

Timing Model = -1.5
20% long, 80% cash

Global allocation of long positions
MSCI EAFE Index 20%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 50%

Top U.S. Sectors
U.S. Oil Equipment, Services & Distribution 5.0
U.S. Oil & Gas 4.0
U.S. Biotechnology 3.5
U.S. Basic Materials 3.0
Precious Metals 2.5
Mid Cap Growth 2.5
Small Cap Growth 2.5
U.S. Utilities 2.0

Top Intl. ETFs
S&P Latin America 40 Index Fund 3
MSCI Canada Index Fund 3
MSCI Brazil Index Fund 3
MSCI Emerging Markets Index Fund 1
FTSE/Xinhua China 25 Index Fund 1
MSCI Hong Kong Index Fund 1
MSCI Mexico Index Fund 1
MSCI Austria Index Fund 1

Strategy 3
Money Market 20.0%
Agriculture 20.0%
Industrial Materials 20.0%
Energy 20.0%
Precious Metals 20.0%
Emerging Markets 0.0%
U.S. REITs 0.0%
U.S. Small Cap 0.0%
U.S. Long Bonds 0.0%
U.S. Large Cap 0.0%
Intl Real Estate 0.0%
EAFE 0.0%

The sentiment models continue to cycle down ever closer to levels of extreme pessimism. If we don't see a good pop to the upside this week, we should see the all 4 sentment models adding points to my timing model by next week.

Week of 6-15-2008

2008-06-15T14:52:00.000-07:00

Timing Model = -2.0

10% long, 90% cash

Global allocation of long positions

MSCI EAFE Index 20%

MCCI Emerging Markets Index 30%

Russell 3000 Index - U.S. 50%

Top U.S. Sectors

U.S. Oil Equipment, Services & Distribution 4.5

U.S. Oil & Gas 3.5

Precious Metals 3.5

U.S. Basic Materials 2.5

U.S. Biotechnology 2.0

U.S. Utilities 1.5

U.S. Health Care 1.5

Top Intl. ETFs

S&P Latin America 40 Index Fund 2

MSCI Canada Index Fund 2

MSCI Brazil Index Fund 1

MSCI Emerging Markets Index Fund 1

FTSE/Xinhua China 25 Index Fund 1

MSCI Hong Kong Index Fund 1

MSCI Taiwan Index Fund 1

MSCI Mexico Index Fund 1

Strategy 3

Money Market 25.0%

Agriculture 25.0%

Industrial Materials 25.0%

Energy 25.0%

Emerging Markets 0.0%

Precious Metals 0.0%

U.S. REITs 0.0%

U.S. Small Cap 0.0%

U.S. Long Bonds 0.0%

U.S. Large Cap 0.0%

Intl Real Estate 0.0%

EAFE 0.0%

Sentiment is neutral but getting to closer to signaling mild over-pessimism. The intermediate term trend is still a bit mixed as the Value Line Composite struggles to keep above its 75 day moving average. Strategy 3 allocations reflect the asset classes everyone has been discussing for many months now: Energy, Industrial Materials, and Agricultural commodities.

Where will the S&P 500 be 12 months from now?

2008-06-08T19:24:00.000-07:00

Take the poll in the side bar --->

Week of 6-8-2008

2008-06-08T19:18:00.000-07:00

Timing Model = -1.0
30% long, 70% cash

Global allocation of long positions
MSCI EAFE Index 30%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 40%

Top U.S. Sectors
U.S. Oil Equipment, Services & Distribution 4.5
U.S. Oil & Gas 2.5
U.S. Basic Materials 2.5
Precious Metals 2.5
U.S. Biotechnology 1.5
U.S. Health Care 1.5

Top Intl. ETFs
MSCI Brazil Index Fund 3
S&P Latin America 40 Index Fund 2
MSCI Canada Index Fund 2
MSCI Austria Index Fund 1
MSCI Emerging Markets Index Fund 1
FTSE/Xinhua China 25 Index Fund 1
MSCI Hong Kong Index Fund 1

Strategy 3
Money Market 16.7%
Agriculture 16.7%
Industrial Materials 16.7%
Energy 16.7%
Emerging Markets 16.7%
Precious Metals 16.7%
U.S. REITs 0.0%
U.S. Small Cap 0.0%
U.S. Long Bonds 0.0%
U.S. Large Cap 0.0%
Intl Real Estate 0.0%
EAFE 0.0%

When trend following gets hard

2008-06-05T18:41:00.000-07:00

The S&P 500 intermediate term trend has gotten a bit muddy lately. We're still below the 200 day moving average, but the index hasn't been significantly below it's 50 day ma since mid April. The S&P500 also hasn't seen a new high for almost three weeks.

Both moving averages are on a path to intersect sometime in early July.

Basically, the big trend is down (last summer to present), the intermediate trend is up (mid March to present), and the short term trend is down (mid May to present). The question is; is the intermediate trend changing, or has the recent pull back only a pause in the uptrend?

Week of 6-1-2008

2008-06-01T18:47:00.000-07:00

Timing Model = -0.5
40% long, 60% cash

Global allocation of long positions
MSCI EAFE Index 30%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 40%

Top U.S. Sectors
Mid Cap Growth 3.5
U.S. Oil Equipment, Services & Distribution 3.5
Precious Metals 2.5
U.S. Oil & Gas 2.5
U.S. Biotechnology 2.0
U.S. Semiconductor 2.0
U.S. Technology 2.0
U.S. Basic Materials 1.5

Top Intl. ETFs
S&P Latin America 40 Index Fund 3
MSCI Brazil Index Fund 3
MSCI Canada Index Fund 2
MSCI Austria Index Fund 1
MSCI Emerging Markets Index Fund 1
MSCI Taiwan Index Fund 1
FTSE/Xinhua China 25 Index Fund 1
MSCI Mexico Index Fund 1
MSCI Hong Kong Index Fund 1

Strategy 3
Money Market 11.1%
Agriculture 11.1%
Industrial Materials 11.1%
Energy 11.1%
Emerging Markets 11.1%
EAFE 11.1%
Precious Metals 11.1%
U.S. REITs 11.1%
U.S. Small Cap 11.1%
U.S. Long Bonds 0.0%
U.S. Large Cap 0.0%
Intl Real Estate 0.0%

Week of 5-25-2008

2008-05-24T21:44:00.000-07:00

Timing Model = -1.5
20% long, 80% cash

Global allocation of long positions
MSCI EAFE Index 30%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 40%

Top U.S. Sectors
U.S. Oil Equipment, Services & Distribution 5.0
U.S. Oil & Gas 3.5
U.S. Biotechnology 3.0
U.S. Semiconductor 2.5
U.S. Technology 2.5
Precious Metals 2.5

Top Intl. ETFs
S&P Latin America 40 Index Fund 3
MSCI Brazil Index Fund 3
MSCI Canada Index Fund 3
MSCI Austria Index Fund 2
MSCI Emerging Markets Index Fund 2

Strategy 3
Money Market 12.5%
Agriculture 12.5%
U.S. Long Bonds 12.5%
Industrial Materials 12.5%
Energy 12.5%
Emerging Markets 12.5%
EAFE 12.5%
Precious Metals 12.5%
U.S. REITs 0.0%
U.S. Large Cap 0.0%
U.S. Small Cap 0.0%
Intl Real Estate 0.0%

I Like U.S. T-Bonds

2008-05-19T20:27:00.000-07:00

I Like U.S. T-Bonds...as a short/intermediate term trade. There's excessive levels of pessimism towards U.S. long bonds right now, even though they've been able to maintain their current uptrend. I'm taking a small position in GVPIX tomorrow.

Week of 5-18-2008

2008-05-19T19:51:00.000-07:00

Timing Model = .5
60% long, 40% cash

Global allocation of long positions
MSCI EAFE Index 30%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 40%

Top U.S. Sectors
U.S. Oil Equipment, Services & Distribution 5.0
U.S. Oil & Gas 4.0
Precious Metals 2.5
U.S. Semiconductor 2.0
U.S. Leisure Goods 2.0
Mid Cap Growth 2.0
U.S. Real Estate 2.0

Top Intl. ETFs
S&P Latin America 40 Index Fund 3
MSCI Brazil Index Fund 3
MSCI Taiwan Index Fund 3
MSCI Canada Index Fund 2
MSCI Austria Index Fund 2
FTSE/Xinhua China 25 Index Fund 1
MSCI Emerging Markets Index Fund 1
MSCI Sweden Index Fund 1
MSCI Mexico Index Fund 1
MSCI South Africa Index Fund 1
MSCI Hong Kong Index Fund 1

Strategy 3
Money Market 11.1%
Agriculture 11.1%
U.S. Long Bonds 11.1%
Industrial Materials 11.1%
Energy 11.1%
Emerging Markets 11.1%
U.S. REITs 11.1%
EAFE 11.1%
Precious Metals 11.1%
U.S. Large Cap 0.0%
U.S. Small Cap 0.0%
Intl Real Estate 0.0%

High Times

2008-05-15T15:36:00.000-07:00

Simple question: Do commodities take a break until we can adjust to the altitude? The pace has been relentless since 2002.

I think I see the fat lady coming

2008-05-14T10:25:00.000-07:00

My Tactical Asset Allocation portfolio is only 50% long right now, but I'm taking a speculative position in UCPIX today because of the mounting negatives. I'm going to use a pretty tight mental exit - the S&P 500 200 day moving average. Granted, if this much followed moving average is breached we're likely to see good follow through, but I'm up to the challenge.

The market negatives are:

short term NASDAQ sentiment is OB
intermediate term sentiment is becoming excessively over optimistic
OB MACD during a presumed bear market
NYSE relative volume has been low for the past several weeks
option expiration week seasonality bias towards short term losses
we're at the beginning of "sell in May" seasonality
anything else?

Week of 5-11-2008

2008-05-11T17:36:00.000-07:00

Timing Model = 0
50% long, 50% cash

Global allocation of long positions
MSCI EAFE Index 30%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 40%

Top U.S. Sectors
U.S. Oil Equipment, Services & Distribution 5.0
U.S. Oil & Gas 4.5
U.S. Biotechnology 3.5
U.S. Basic Materials 2.5
Precious Metals 2.5

Top Intl. ETFs
S&P Latin America 40 Index Fund 3
MSCI Brazil Index Fund 3
MSCI Taiwan Index Fund 1
FTSE/Xinhua China 25 Index Fund 1
MSCI Canada Index Fund 1
MSCI Emerging Markets Index Fund 1
MSCI Sweden Index Fund 1
MSCI Spain Index Fund 1
MSCI Singapore Index Fund 1
MSCI Austria Index Fund 1
MSCI Mexico Index Fund 1
MSCI Belgium Index Fund 1
MSCI South Africa Index Fund 1
MSCI Netherlands Index Fund 1
MSCI France Index Fund 1

Strategy 3
Money Market 16.7%
Agriculture 16.7%
U.S. Long Bonds 16.7%
Industrial Materials 16.7%
Energy 16.7%
Emerging Markets 16.7%
U.S. REITs 0.0%
EAFE 0.0%
Precious Metals 0.0%
U.S. Large Cap 0.0%
U.S. Small Cap 0.0%
Intl Real Estate 0.0%

Volume

2008-05-07T16:36:00.000-07:00

Isn't the 10 day moving average 18.06% below the 200 day moving average or are my math skills totally in the toilet? I put in pink and green bands to correspond roughly to what Goefert used as break points. I don't have on this chart is the slope of the S&P 500, but I believe it's 200 day ma started to decend beginning in mid January.

Week of 5-4-2008

2008-05-04T15:38:00.000-07:00

Timing Model = .5
60% long, 40% cash

Global allocation of long positions
MSCI EAFE Index 30%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 40%

Top U.S. Sectors
U.S. Oil Equipment, Services & Distribution 5.0
U.S. Oil & Gas 4.5
Precious Metals 4.0
U.S. Basic Materials 3.0
U.S. Biotechnology 2.5
U.S. Leisure Goods 2.0
Mid Cap Growth 2.0
U.S. Health Care 2.0

Top Intl. ETFs
S&P Latin America 40 Index Fund 3
MSCI Brazil Index Fund 3
MSCI Taiwan Index Fund 2
FTSE/Xinhua China 25 Index Fund 2
MSCI Canada Index Fund 1
MSCI Emerging Markets Index Fund 1
MSCI Sweden Index Fund 1
MSCI Spain Index Fund 1
MSCI Hong Kong Index Fund 1
MSCI South Korea Index Fund 1
MSCI Singapore Index Fund 1
MSCI Austria Index Fund 1

Strategy 3
Money Market 12.5%
Agriculture 12.5%
U.S. Long Bonds 12.5%
Industrial Materials 12.5%
Energy 12.5%
Emerging Markets 12.5%
U.S. REITs 12.5%
EAFE 12.5%
Precious Metals 0.0%
U.S. Large Cap 0.0%
U.S. Small Cap 0.0%
Intl Real Estate 0.0%

Don't Fight the Fed

2008-04-30T06:54:00.000-07:00

The chart above is the Fed Funds target rate with the S&P 500 from 1980 to present. I marked the dates where the Fed made their "last cut" (after 3 or more successive cuts). Not all cases resulted in periods of terrific returns, however, '83-''84 seems to be the only period that put in an notably poor performance.

If today ends up as a "last cut", odds are in favor of a bull market.

Have Basic Materials Peaked?

2008-04-26T17:14:00.000-07:00

The Basic Materials sector plummeted from my top U.S. Sectors ranks this week, so I decided to take a closer look at each model component. My U.S. sector model is heavily weighted towards momentum indicators, but I have built in several other indicators that act as a counterbalance.

Basic Materials have been a top performer over the past 90, 180, and 250 days. By those measures, this sector is a text book candidate to outperform other sectors over the next few months. However, the Basic Material sector also has several technical negatives to contend with.

First, this sector is overbought. Note the pink bands on both the short term and intermediate term TRIX in the chart above. Even in a bull market, overbought conditions usually signal a pause in upward ascent. What I can't show here is a chart from Jason Goefert of Sentimentrader.com (It's a subscription service). The Rydex Basic Materials sector fund assets represents 18.3% of all sector funds. That's pure irrational exuberance. Also, the charts on the Proshares Ultra Basic Materials and Ultra Short Basic Materials Assets illustrate sentiment extremes that don't exactly give a contrarian a warm and fuzzy for further gains.

Extreme optimism is only one reason to raise an eyebrow about Basic Materials. I've studied technical analysis for many years, and one of the few reliable indicators that signal market tops is a long term momentum divergence. In the chart above you can see the 60-130-45 Moving Average Convergence Divergence peaked last July. You can also see $DJUSBM continued to climb to ever higher heights. This is a technician's textbook example of a negative divergence - not exactly a bullish sign.

The last bearish tea leaf is seasonality. Historically, May is the beginning of poor performance for the Basic Materials sector. Given that many economist believe the U.S. is in or near a recession, basic materials doesn't seem to be a great place to be for the next few months.

I'd love to hear your thoughts.