Friday, July 16, 2010

Research Notes on Rydex Asset Data

Every week I present the following chart in our sentiment round up. See figure 1. It is the Rydex total bull to bear ratio. The indicator in the lower panel of figure 1 measures all the assets in the Rydex bullish oriented equity funds divided by the sum of assets in the bullish oriented equity funds plus the assets in the bearish oriented equity funds. When the indicator is green, the value is low and there is fear in the market; this is where market bottoms are forged. When the indicator is red, there is complacency in the market. There are too many bulls and this is when market advances stall.

Figure 1. Rydex Total Bull/ Bear Ratio/ weekly

In general, the indicator is responsive enough that it tracks price changes relatively quickly. However, over the past two weeks the indicator has headed lower while prices have headed higher. This is unusual. In other words, the Rydex market timers have not been buying into the rally. Typically, these traders are wrong on the markets, but they have yet to turn bullish despite the 10% gains over 10 trading days.

These research notes, which you can access below, on this interesting divergence were presented three days ago to subscribers of our Premium Content service. The Premium Content service is the best $104 you will ever spend on market research. The daily report is meant to keep you on the right side of the market and improve your market timing. That's 40 cents a day!

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Rydex Research

2 comments:

Rahul said...

From your data I draw the conclusion that the Rydex market timers were stupid and loosing money week after week after week. Finally nature and darwinism caught up with them and they all went bankrupt last week. Therein lies the shortcoming of TA. Just because a particular indicator works for a while does not mean it will continue working. It may stop working without any warning at a critical juncture setting up all the adherents to a big loss. caveat emptor.

Guy M. Lerner said...

Rahul:

I think indicators stop working because they do; when we look at why something works in the past, we embrace it because it does work; but markets change.

I don't think this is an indictment of TA because this kind of analysis is just as sound as fundamental analysis.

There are times when this indicator actually tracks the price action very well; it turns up when prices do. It is only a contrary indicator in extremes, but the rest of the time it tends to track prices well; so even here the indicator was extreme but price turned yet the indicator didn't; when the market turns these short term timers are the first to jump on board and they did not do that this time

That was the point of the article and divergence between the indicator and price; market doesn't go higher because people are sitting on the sidelines; it goes higher when those on the sidelines suddenly jump in; they have not jumped in here