Rydex Market Timers: More Normal

When we last visited the Rydex market timer a couple of days ago, we had the assets in the bearish and leveraged funds greater than the bullish and leveraged funds, and this typically is a bull signal. We also had the assets in the Rydex Money Market Fund at a very low level, and this typically is a bear signal. This was quite an unusual finding in the 9 years of data that I have. When there are more leveraged bears than bulls, we will see fear in the market as traders move to the safety of the money market fund. The assets in the money market fund should be rising - not at a cycle low. I did not interpret this set of circumstances as those greedy bears. I called it a mixed short term sentiment picture. Nonetheless, da' bulls won out, which is not surprising.

Now here we are several days later and we find 1) the major indices are back near their highs; 2) on diminishing volume as prices clawed their way back to those highs; 3) with negative divergences starting to appear between market breadth and price. Prices are essentially at the upper end of the trading range that I have been writing about for the last couple of months.

Wasn't it only a week ago that most pundits were calling for a 10% correction when in reality the indices were only at the bottom of that trading range? Let me repeat the words that I have been writing for over 4 weeks now:

"It will be important to maintain your discipline (for risk reasons) and buy at the lows of that trading range and sell at the highs to extract any profits from this market."

Now we have the bullet proof market as long as the Fed remains complicit in crushing the Dollar. Now the talk isn't of a 10% correction but how great everything looks. However, if we interpret the data consistently, very little has changed with the exception that the indices are now at the top of their trading range, and they got their with very little sponsorship.

Oh, one other thing has changed: the assets in the Rydex bearish and leveraged funds are no longer greater than the assets in the bullish and leveraged funds. While the bull to bear ratio is not extreme (for example greater 2 to 1), the amount of assets in the Rydex Money Market Fund remains very low. So this is the relationship one would expect to see: increasing bullishness with diminishing fire power or assets in the money market fund. That's a more normal relationship.

Figure 1 is a daily chart of the S&P500 with the amount of assets in the Rydex Money Market Fund in the lower panel.

Figure 1. S&P500 v. Rydex Money Market/ daily

Figure 2 is a daily chart of the S&P500 with the amount of assets in the Rydex bullish and leveraged funds versus the amount of assets in the leveraged and bearish funds.

Figure 2. Rydex Bullish and Leveraged v. Bearish and Leveraged/ daily

TIPS: A Good Thing!

I first mentioned Treasury Inflation Protected Securities or TIPS in an article on August 28 when I noted that "the TIP's ETF has "broken out" as it appears to be attracting the interest of investors." Since that time, the i-Shares Lehman TIPS Bond Fund (symbol: TIP) or TIP's ETF is up 3%.

Figure 1 is a daily chart of the i-Shares Lehman TIPS Bond Fund (symbol: TIP) with volume bars in the middle panel and the on balance volume indicator (with a 40 bar moving average) in the lower panel. On Monday, price hit a new closing high for the move, and the OBV indicator is leading price higher. This is good.

Figure 1. TIP/ daily

So you say, "So, what is the big deal?". The S&P Depository Receipts (symbol: SPY) is up 6% over the same time frame.

As it turns out, SPY is twice as volatile as TIP, and in the current market environment, my money management strategy would be to hold a position in TIP that is twice the cash value of the SPY. So in essence, with this position in TIP, I have not underperformed.

Furthermore and to the benefit of my portfolio, TIP is poorly correlated with the SPY on 156 week, 52 week and 26 week time frames. A position in TIP has not hurt my portfolio performance, and in all likelihood, it has decreased the volatility. This is a good thing!

Figure 2 is a monthly chart of the i-Shares Lehman TIPS Bond Fund (symbol: TIP). A monthly close below the pivot at 102.75 would be reason enough to abandon the notion of higher TIPS. TIP looks like it has the potential to get to $110.

Figure 2. TIP/ monthly

To find other articles that I have written on TIPS, use the search function in the right hand column of this blog. Type the word "TIPS" into the box.

A Third Reason To Own Crude Oil

We had two reasons to own crude oil, and now we can add a third.

Figure 1 is a weekly chart of a West Texas Crude Oil (cash data). The indicator in the middle panel measures crude oil's 52 week performance relative to a basket of 8 currencies.Those currencies are: 1) Australian Dollar; 2) Canadian Dollar; 3) Swiss Franc; 4) Eurodollar; 5) British Pound; 6) Singaporean Dollar; 7) Japanese Yen; 8) US Dollar. Priced in these currencies, crude oil is out performing, and it is far from extreme.

Figure 1. Gold v. Currencies v. Sentiment

The data in the lower panel comes from the Market Vane Corporation, which publishes the Bullish Consensus. The current value is 44 meaning that only 44% of advisers are bullish on crude oil; peaks occur when the value is above 80%. When I last showed this data, the value was 39% when crude oil was 10% lower.

Dollar Index Technicals

Figure 1 is a weekly chart of the US Dollar Index (symbol: $DXY). The pink labeled price bars within the ovals are positive divergence bars.

Figure 1. $DXY/ weekly

The US Dollar Index remains in a downtrend. However, a weekly close above 76.58, which is the high of the recent positive divergence bar, would nullify that down trend, and in all likelihood, the Dollar Index would trade in a range. A close above the pivot at 79.46 would turn the down trend into an uptrend.

A weekly close below the low (75.20) of the current positive divergence could lead to an acceleration of the down trend as those anticipating a trend reversal give up their losing positions. This is the "this time is different" scenario but in reverse.

Some of the prior articles on the Dollar Index, which explain some of the strategies that I use to arrive at these conclusions, are located here:

The Technical Take: Very Dangerous Time For Dollar Index (Jun 19, 2009)

The Dollar Index: The Trend Is Your Friend (September 18, 2009)

The Technical Take: This Time Is Different (In Reverse) (August 21, 2009)

The technical picture for the Dollar Index is pretty straight forward. And while "everything under the sun" goes up when the Dollar goes down, it is still my contention that commodities will out perform equities if only because in this liquidity driven environment equities will be prone to sudden sell offs. As a reminder, you may want to review the article "The Inflation Indicator Meets The "Dumb Money" Indicator".