Sunday, December 26, 2010

This Time Is Different

"This time is different".  It really, really is.  Trust me.  It's true.  Those famous 4 words of investing that should have you running the other way and that should be relegated to the trash bin of investing along with such phrases as "stocks climb a wall of worry" and the "stock market can stay irrational longer than you can stay solvent" are as true today as any time in the past 10 years.

Why is "this time different"?  Take a look at the Rydex Buying Power indicator.  See figure 1 a weekly chart of the SP500; the indicator is in the lower panel.  The Rydex Buying Power indicator assesses the amount of money on the sidelines.  It is “fuel” available for buying.  This indicator considers both non – committed money (i.e., assets in the money market fund) and committed money (i.e., assets in all of the bearish funds) that could potentially wind up in bullish funds as available money on the sidelines.  In other words, whatever money is out there and not already in bullish funds –whether it be neutral money or bearish money - is money available to go into bullish funds.

Figure 1. Rydex Buying Power Indicator/ weekly (12/06 to present)

Low indicator values suggest little money on the sidelines and are consistent with excessive bullishness (i.e., bear signals).  High indicator values are consistent with increased buying power and are consistent excessive bearishness (i.e., bull signals).  In the figure above, the red dots over the price bars indicate times when the indicator value is less than or equal to 50%.  These are periods of excessive bullishness when there is diminishing buying power on the sidelines. 

So why is "this time different"?  The Buying Power is at its lowest value in 10 years.  Now that is really something different.  What won't be different is the outcome.  I am sure at every red dot on the graph investors were buying the hype that "this time is different".  

So "this time is different".  Yes, it is true.  The Rydex Buying Power indicator is at its lowest point in 10 years.  No doubt investors believe that Ben Bernanke (a.k.a., Santa Claus) and his merry elves will continue to deliver great returns in the months ahead.  It will be Christmas everyday!  I am of the opinion that there will be better risk adjusted buying opportunities in the future.  

For the record, figure 2 is the Rydex Buying Power indicator from 11/01 to 12/06.

Figure 2. Rydex Buying Power Indicator/ weekly (11/01 to 12/06)

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Onlooker said...


Figure 2 is the same chart as in figure 1.

Guy M. Lerner said...



It has been corrected

Happy Holidays

Onlooker said...

No, thank you. I wanted to see the chart! :-) Good work, as usual.