Thursday, January 21, 2010

Rydex Market Timers: Update!

The Rydex market timers continue to serve as a good short term contrarian gauge to market action.

It is late at night and I will be brief.

Figure 1 is a daily chart of the S&P500 with the ratio of the Rydex leveraged and bullish assets to the leveraged and bearish assets in the lower panel. Prior to today's drubbing, this ratio was greater than 2 - which is our level of extreme bullishness - for 5 out of the last 6 trading days. After today, the bulls have backed off such that the ratio now stands at 1.78. Prior extremes in this rally are noted with maroon colored bars.

Figure 1. S&P500/ daily/ leveraged bulls v. leveraged bears

I know this stuff is just bullshit and "this time is different", but I am having a hard time seeing that right now!! In addition, with so many investors on the wrong side of this trade, this supports my contention that investors and traders continue to overestimate their abilities to identify market tops. This is the most leveraged and bullish these investors have been since the March 2009 lows, yet this pullback is starting to look like it will last more than two trading days.

Figure 2 is the amount of assets in the Rydex Money Market Fund. Yesterday's value was the lowest since the rally began in March, 2009. This I find unbelievable, but hey, it is what it is! After today, the value remains low but it has not broken it's down trend channel.

Figure 2. S&P500/ daily/ money market funds

On a longer term time frame, the Rydex data continues to support the notion that the market will remain under pressure. Shorter term is indeterminate although the recent bullish extremes (i.e., bear signal) have been relieved.

Lastly, a comment about the assets in the Rydex gold fund. After Wednesday's price action, the amount of assets in this fund continued to hover around $300 million. Surprisingly, the amount of assets in this fund has not really changed since gold peaked about 6 weeks ago. After today (Thursday), the amount of assets in the gold fund is down by over 40% from yesterday. While difficult to use as a timing tool, I believe this data supports the notion that investors continue to buy at the highs and sell at the lows!


Anonymous said...

Thx Guy!

Fargon Myles said...

This is so interesting. I use simple indicators and they have been in the stratosphere for weeks--however, the bullish craziness was just as likely to raise the indices another 5%. Rydex confirms the madness. Let it come down!

D-man said...


Can we have your opinion on silver please? It looks like a gigantic double top on weekly there...

Thanks in advance!

Anonymous said...

Well done Guy ! More sense from you than most bloggers put together.

Guy M. Lerner said...

SLV looks like a head and shoulders top

see previous article on SLV