Friday, October 9, 2009

Just Fascinating

For the first time in a couple of weeks, the amount of assets in the Rydex bearish and leveraged funds is greater than the assets in the bullish and leveraged. See figure 1 a daily chart of the S&P500 (symbol: $INX).

Figure 1. Rydex Bullish and Leveraged (green) v. Bearish and Leveraged (red)

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.

I have recently presented data on why I find the Rydex asset data useful from a contrarian point of view.

So what is so fascinating?

One, these market timers have jumped on board to bet against this market on a Friday before a 3 day holiday weekend. Two, I thought all the "shorts" had been crushed, and it is surprising to see them coming out with the market just a whisper from the highs. Three, this is not the pattern we have seen over the past 4 months. Typically, higher prices have been met by these market timers betting on the market.

My thoughts are: 1) shorting this market beyond 1 to 2 hours has been very difficult; you really have to "thread the needle" to get it right; 2) shorting this market on a Friday before a holiday doesn't seem fruitful; 3) betting with the Rydex market timers is not the high odds play.

While my gut says: 1) stocks are only for renting (not owning); 2) the recent 5 day blitz was on declining volume; 3) we are at the top of trading range. I am not sure I am ready to step up to the plate and take a swing on the short side. Even if I am wrong, I have no problem with sitting this one out.


Anonymous said...

Does this data tell you anything? I looked at the charts and outside of perhaps one or two instances when this had some predictive powers, rest of the time it has no predictive powers

Anonymous said...

Looks like random data.