Wednesday, August 5, 2009

Public Service Announcement

I don't want to be a day trading service, and I don't want to spoil the bull party. So let's just consider this a public service announcement: looking at the Rydex asset data, bullish sentiment is becoming rather extreme.

As you know, one of my favorite aspects of the Rydex data is the amount of assets in the bullish and leveraged funds versus the amount of assets in the leveraged and bearish funds. Not only do we get to see what direction these market timers think the market will go, but we also get to see how much conviction (i.e., leverage) they have in their beliefs. See figure 1 a daily graph of the S&P500 (symbol: $INX) with the Rydex leveraged bulls (green line) versus the leveraged bears (red line) in the lower panel. Typically, we want to bet against the Rydex market timer even though they only represent a small sample of the overall market.

Figure 1. Bullish and Leveraged v. Bearish and Leveraged

As of yesterday's close, the amount of assets in the bullish and leveraged funds was 2.3 times that in the bearish and leveraged funds. The last time this occurred was June 3, 2009 to June 16, 2009 where it happened 3 times over that 2 week span. Before that, there were multiple occurrences between December 7, 2007 and January 8, 2008. And before that, there were 3 more spikes of investor enthusiasm from October 17, 2007 to October 31, 2007. I don't need to remind readers what happened after the 2007 excesses, but just look at any price chart if you have forgotten.

Yes, I know this is the "mother of all bull markets" (sic), and we can throw all the analysis out the door. This has been pointed out to me by many readers over the last two weeks. So be it. Just remember, this is only a public service announcement!!


Anonymous said...

thanks for the post guy !i have been a huge fan of your work when you were writing for real money. I think this data has a ton of credence and i am not at all a bearish person by nature but a very cautious investor and trader. i did want to ask how this did in the early going of the 2003 just to see how it came in then . That push though it did stall in the summer was exceptional and i know alot of other indicators at that time did go very over optomistic yet didnt stop the rally then.

Stas said...

This rally is like rally in 1929 :)). Even trade days... 107 in 1929, and 107 now aproximately. May be there will be similar end? What you think Guy? PEoples psichology don`t change