Tuesday, October 27, 2009

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


Anonymous said...

AGain, thank you for the post, enjoy your great work very much!

Anonymous said...

Also it sure look like retail are going all in on options too?! Look at ISEE this morning, on the drop around 10:00AM it seems they are buying calls in bulk! 175 on equity? That's almost 2 to 1 call buying and indices at 100+? Wow, that's pretty high (for indices that is)

Johnny G. said...

Nice work. Yes, this is getting interesting. As of Tuesday's close the Rydex ratio has become even more extreme at 2.38, with money-market assets falling to 1,271.97.

It looks like it is going to take another big down day to start to shake out the bullish Rydex timers. Then they will increase their selling on subsequent up days, bringing bullish-and-leveraged assets down to around 500.

Finally, they will start going net short as the rally progresses, until covering and going long again at the top.

Am I mistaken, or is that not the pattern we've seen the last two or three sellofs?

Anonymous said...

Johnny G, are you kidding me? Really? Rydex bullish actually gone up after today's drop?! Wow, this is really interesting... Along with ISEE, gee, this must be the buy of century...

Johnny G. said...

Nope, I'm not kidding. Here is what I come up with:

Bullish & leveraged: 798.84
Bearish & leveraged: 335.19
Ratio: 2.38 to 1

Money market: 1,271.97

Seeing the bullish number near 800 this far into a selloff looks very unusual compared to the past three times.

The Rydex timers are showing unprecedented confidence that this is yet another dip-buying opportunity.

Guy M. Lerner said...

Johnny G

I don't get my data until the morning but Mark Hulbert (of MarketWatch and sentiment fame) use to say that when market timers buy like this --i.e., ignore the warnings of a top -- then it is a top.

time will tell

GreenAB said...

i am a daily reader.
i got no comment on the story.

just want to say THANK YOU for your great work. please keep it up!

i watch your analysis of the raydex ratio with high interest.

would it be possible (like this week) to update the developments twice a week?

thank you very much!