Friday, September 25, 2009

Rydex Market Timers: All In

Yesterday's mini sell off has brought out the dip buyers. At least this is what we can infer from our Rydex market timers.

Figure 1 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; this data is hidden. The indicator in the lower panel measures the ratio of assets in the bullish and leveraged funds to the assets in the bearish and leveraged, and as of Thursday's close, this ratio was greater than 2 to 1. Since this bull run began in March, 2009, a ratio greater than 2 generally was a marker of a short term top - not a buying opportunity. The other times the ratio was greater than 2 to 1 are indicated by the gray vertical bars in figure 1.

Figure 1. Rydex Bullish and Leveraged v. Rydex Bearish and Leveraged/ daily

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. Typically, we want to bet against the Rydex market timer even though they only represent a small sample of the overall market.

Figure 2 is a daily chart of the S&P500 with the amount of assets in the Rydex Money Market Fund in the lower panel. When the money market fund is flush with cash, one can assume that the Rydex timers (like market participants in general) are fearful of market losses. From a contrarian perspective, these are good buying opportunities. When the amount of assets are low (like now), these market timers are all in; one should be on the lookout for market tops. There is little buying power left. As of Thursday's close, the amount of assets in the Money Market Fund was at its lowest value since the bull run began in March, 2009.

Figure 2. Rydex Money Market Fund/ daily


Tyler said...

great post Guy. thanks


cvg said...

Very nice post.

Could you tell us where yo get the Rydex asset data series?