Monday, July 20, 2009

Holy Short Covering, Batman!

If I were to watch one piece of data from the Rydex asset data, it would be the leveraged bulls v. leveraged bears. Not only can we discern what way this small group of market timers is leaning (i.e., bull v. bear bet), but we can also get a glimpse of how much conviction (i.e., use of leverage) they have in their belief. Typically, we want to bet against these market timers.

Figure 1 is a daily chart of the S&P500 with the Rydex leveraged bulls (green line) versus the Rydex leveraged bears (red line). For 4 out of 5 days last week during the market's romp, the amount of assets in the bearish and leveraged funds was greater than the amount of assets in the bullish and leveraged funds. These market timers were betting against the market and got crushed. Nothing like good old fashion short covering.

Recent excesses by the bearish and leveraged are noted with the dotted vertical lines.

Figure 1. Rydex Leveraged Bull v. Bear/ daily

My time frame is a bit longer term, and these short term swings are under my radar. On the other hand, with such strong returns over such a short time period, I guess I should start paying more attention to these things. So let's note that the assets in the leveraged and bullish funds now exceeds those in the leveraged and bearish. Recent excesses by the bullish and leveraged Rydex timers led to short term tops as noted by the gray rectangles over the price bars.


Dave Narby said...

You have some of the best RYO (roll yer own) indicators I've seen.

I assume the red line are the bears?

Looks like a good time to sell (or short) near term...

Guy M. Lerner said...

I have never heard that term...roll yer own...I am not sure what it means

But thanks for the compliment

red line is leveraged bears

jbr said...

Thanks for the idea!

Question though:
Total assets is going to change as a function of market value so isn't it better to look at number of units held (total assets / nav)?

Guy M. Lerner said...

If we are comparing bull to bear then the "NAV" part would cancel itself out

jbr said...

The NAV of the bull ETF will be different from the bear ETF?

Guy M. Lerner said...

To my knowledge the numbers I get from Rydex are total assets in $$$ in each fund; I understand what you are asking but I am just looking at total $$$$ invested in bullish v. bearish funds

GreenAB said...

could you please add the bull/bear RATIO, if possible on a longer term chart? thanks a lot!

AC said...

Interesting find.

Do you manually enter the numbers into a spreadsheet?

I would suggest using ProShares as they have better volume or even all three.