Tuesday, November 10, 2009

Rydex Market Timers: More Normal

When we last visited the Rydex market timer a couple of days ago, we had the assets in the bearish and leveraged funds greater than the bullish and leveraged funds, and this typically is a bull signal. We also had the assets in the Rydex Money Market Fund at a very low level, and this typically is a bear signal. This was quite an unusual finding in the 9 years of data that I have. When there are more leveraged bears than bulls, we will see fear in the market as traders move to the safety of the money market fund. The assets in the money market fund should be rising - not at a cycle low. I did not interpret this set of circumstances as those greedy bears. I called it a mixed short term sentiment picture. Nonetheless, da' bulls won out, which is not surprising.

Now here we are several days later and we find 1) the major indices are back near their highs; 2) on diminishing volume as prices clawed their way back to those highs; 3) with negative divergences starting to appear between market breadth and price. Prices are essentially at the upper end of the trading range that I have been writing about for the last couple of months.

Wasn't it only a week ago that most pundits were calling for a 10% correction when in reality the indices were only at the bottom of that trading range? Let me repeat the words that I have been writing for over 4 weeks now:

"It will be important to maintain your discipline (for risk reasons) and buy at the lows of that trading range and sell at the highs to extract any profits from this market."

Now we have the bullet proof market as long as the Fed remains complicit in crushing the Dollar. Now the talk isn't of a 10% correction but how great everything looks. However, if we interpret the data consistently, very little has changed with the exception that the indices are now at the top of their trading range, and they got their with very little sponsorship.

Oh, one other thing has changed: the assets in the Rydex bearish and leveraged funds are no longer greater than the assets in the bullish and leveraged funds. While the bull to bear ratio is not extreme (for example greater 2 to 1), the amount of assets in the Rydex Money Market Fund remains very low. So this is the relationship one would expect to see: increasing bullishness with diminishing fire power or assets in the money market fund. That's a more normal relationship.

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


Anonymous said...

Guy, thank you very much for you constant Rydex/sentiment analysis. It has been very helpful and great appreciated!

dacian said...


I do wonder where your "big thing indicators" are on S&P 500. Are they showing a secular change here or still not the case? thanks

Anonymous said...

After last few day of ramp, AAII has gone to 50/50 it seems. Some bear were converted to bulls (last week was almost 2:1 bearish I think)


So how's rydex timer now?

Johnny G. said...

Rydex timers bought the dip today in large enough amounts to overcome the drop in bullish-fund NAVs. As of Thursday's close:

Bullish & leveraged: 696.28
Bearish & leveraged: 430.75
Ratio: 1.62

Money market: 1,277.98

Note that Rydex money-market assets now are near extreme lows, which typically has signified complacency.

Guy M. Lerner said...

Agree with Johnny G.

This is the correct alignment you should see at a short term top (which in my opinion is starting to look like a real intermediate term top); too few assets in money market fund as they are too bullish

thanks for posting!!

Anonymous said...

Thank you, both Johnny G and Guy! Let's hope they push the ES up tonight!