Friday, November 6, 2009

Rydex Market Timers: Extremely Mixed

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.

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.

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

At first blush when looking at these two graphs, you would have to say that the bearish and leveraged Rydex market timer is betting against the market to an extreme degree as the red line is greater than the green line in figure 2. Why would someone assume it is extreme? Because the amount of assets in the Rydex Money Market Fund is extremely low.

However, my interpretation is that this represents a mixed short term sentiment picture. The assets in the leveraged bear funds are greater than the leveraged bull funds and this is bullish. But truth be told, the ratio is not too extreme. On the other had, the amount of assets in the Rydex Money Market Fund is low and for the past several months, this has been bearish as this is a sign of greed. Typically, one does not see this combination of bearish and leveraged greater than bullish and leveraged associated with low levels of assets in the money market fund. I guess one can surmise that the bears are getting greedy. But that isn't how it normally works. Assets in the money market are usually higher and rising (as a sign of fear) when the bearish and leveraged assets are greater than the bullish and leveraged assets.

However, looking a little more closely at the data from Wednesday to Thursday, we note that about $200 million dollars came out of the Rydex Money Market Fund and close to $200 million dollars went in to the Rydex bearish and leveraged assets. So yes, the Rydex bearish and leveraged assets are high relative to the bullish and leveraged and the assets in the Rydex Money Market Funds are low, and if appears those assets came out of the money market fund to make a bearish bet. The bulls haven't given up yet.

In sum, my interpretation of these two extremes is that it represents a mixed picture, and this is not the norm.

Lastly, I want to thank Johnny G. who has been nice enough to post some his findings and interpretation of the Rydex asset data in the comment sections of the blog. Great work!


Tyler said...

for whatever it's worth, i think the directional bets are more important than the cash levels. in other words, i interpret this as showing that investors are bearish, thus, contrarily bullish. Although, i agree that it is perhaps not as bullish as if the cash levels had also gone up...nothing is perfect, right?

But combine this data with the most recent aaii data: Bears minus Bulls = -33.34. the lowest reading since march, lower than the july 9 reading, which turned out to be a nice buy point off the consolidation within the uptrend.

Just a thought. it seems that there is still a lack of buy-in to this rally. what say ye?

Guy M. Lerner said...

Hey T.

No doubt there is a lack of buy in and it has been that way for a while.

But that does not change the notion that the major indices plus important "hot" sectors like semiconductors and oil services are under distribution

With regards to the Rydex data, I am not trying to rationalize the data but just present this odd situation. I went back to 2001 and in most (>90%) of the signals where there were too many leveraged bears you had rising assets in the money market funds; money market funds are not at their lows

My nuanced interpretation from this is that the bulls aren't fearful but remain hopeful and there is still no money on the side lines to move the market higher; the bears are definitely hopeful; in the end, we all grind away with in a sloppy trading range.

Anonymous said...

thx Guy and Johnny, looking forward to your weekly sentment (dumb/smart) money indicator analysis. Also looking forward to rydex data after today's ramp!

Johnny G. said...

Anonymous ~ As of Friday's close:

Bullish & leveraged: 458.06
Bearish & leveraged: 650.81

Ratio: .70

Money market: 1,367.46

Tyler ~ To your point about sentiment readings compared to July, at 650.81 the Rydex bearish & leveraged funds are now at their highest levels since July.

Guy ~ Thanks for the hat tip!