Wednesday, October 28, 2009

Rydex Market Timers: Reminds Me Of My Own Trading

In a show of doing the same thing over and over again or as I like to call it - hitting your head on the wall until it hurts - the Rydex market timer continues to anticipate a bounce in the market. This reminds me of my own market follies --only kidding!!

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 Tueasday'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 Tuesday's close, the assets in the bullish and leveraged funds were greater than the bearish and leveraged by 2.38 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...

Is actually quite interesting to see ISEE action this morning... When we start the sell off, you see ISEE was very bearish and then suddenly around 12:30 it started to become a bit more bullish as it seems retail try to catch a falling knife...

Anonymous said...

it will be very interesting to see if rydex still bullish after today sell off... I really doubt it though...

Guy M. Lerner said...

Rydex is just one tool...other tools have been helpful including the strong trends in gold, crude oil and Treasury yields...these are major headwinds for equities and as suggested 3 weeks ago there was a high likelihood of a quick and sudden down draft as this is what you see in this type of liquidity driven environment

Johnny G. said...

Here is what I came up with as of Wednesday's close:

Bullish & leveraged: 773.12
Bearish & leveraged: 382.86
Ratio: 2.02 to 1

Money market: 1,277.92

Although the Rydex ratio has declined from Tuesday's level of 2.38, it's important to remember that assets of the bullish & leveraged funds took a big hit today because of declines in the NAVs.

Specifically, the two largest bullish & leveraged funds fell by 3.88% and 4.66%. HOWEVER, bullish & leveraged Rydex assets in total declined only by 3.22% (from 798.84 to 773.12)!

The upshot of which is that Wednesday apparently saw NET BUYING of the bullish & leveraged funds that partially offset the declines in the NAVs.

The bearish & leveraged funds also saw net buying on Wednesday in addition to the increase in assets attributable to the rising NAVs.

So, it appears that the "organic" portion of the decrease in the ratio (from 2.38 to 2.02) is fully attributable to buying activity in the bearish & leveraged funds. The bullish Rydex timers are still stubbornly adding to their losing positions.

Meanwhile, money-market assets remain within 0.50% of Tuesday's low, as the Rydex timers remain "all in."

Guy M. Lerner said...

Johnny G

Thanks for the update and analysis

Good work

Goatmug said...

I continue to try to grapple with the notion that when equities get clobbered ($ strength) that TIP will go higher. Just seems to not be the instrument that I'd choose...

I appreciate you pointing this out, and heck just look at the last 5 days to validate your observation, but why would an institutional investor go into TIPS or the etf TIP vs a 2,7,or 10 year treasury? Are they simply diversifying into these as well?