Rydex Market Timers: Buying The Dip

The Rydex market timer, as a representative sample of investors, was buying yesterday's sell off.

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. 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 Monday'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 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. 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. As of Monday's close, the assets in the bullish and leveraged funds were greater than the bearish and leveraged by 2.07 to 1; referring to figure 2, this would put the green line greater than red line. When this ratio is greater than 2 the rally has generally stalled as noted by the maroon vertical lines.

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