Will Rydex prove the bears wrong? Tune in next week...
"Charles Norton
Rydex fund flows
9/26/02 08:34 AM EDT
A hedge fund friend of mine from Plano, TX pointed something out to me that I think warrants attention. It seems an unbelievable amount of funds have recently been flowing into bearish Rydex funds.
In monitoring traders' sentiment on an intermediate-term basis, looking at moving averages of fund flows is more useful than using daily data, which tends to be too noisy. When enough assets move into bearish funds to extend the 10-day moving average of the percentage of assets in bearish funds more than 20% above the 50-day moving average, this has been highly correlated to market lows (at least short-term lows). With this spread currently at just over 30%, this indicates too many traders are bearish, and as a contrarian indicator, is a bullish data point.
At the same time, if you look at a ratio of bullish flows to bearish flows, which shows the flows into bullish funds relative to bearish funds, this ratio is at an extreme level. This ratio can be thought of as a stochastic, and it has a current reading close to zero: maximum oversold. Deeply oversold levels in this stochastic also typically coincide with short-term market lows.
Just as too much money was chasing the speculative bubble in early 2000 only to be too late to the party, it seems traders now view the bearish side as "easy money." In a market that tries to frustrate as many people as possible, ensuring there is no "easy money" to be made, we interpret these Rydex flows as important data points for the bullish case." |
