DecisionPoint.com tracks net cumulative cash flow of Rydex mutual funds as a way of estimating sentiment in various sectors. The theory is that money 'ought' to follow prices, more or less. In the last several months this indicator has been rather helpful in identifying problematic price moves by the appearance of price/cash divergences.
On the above chart of Rydex Precious Metals Fund, I have highlighted the first divergence with red circles. Note how there was virtually no cash flow supporting the advance into the January price top. An indication that the advance would fail. Next the blue circles show a blowoff move in February. Lots of money moved into the fund, but prices failed to respond positively enough. Again, an indication that the advance would fail.
Now we see a precipitous drop in prices, highlighted by the green circles; however, note that a proportionate amount of cash has not yet fled the sector. To me this indicates an unrealistic optimism, and my conclusion is that prices will have to drop farther in order to increase bearish sentiment to appropriate levels.
