Decision Point tracks actual cash flowing into and out of Rydex mutual funds, and, while cash flow normally runs parallel to price, divergences can often appear ahead of price reversals. For example, let's look at Rydex Energy and Rydex Energy Service Funds.
During the last four weeks of the price correction that began at the March top you will notice how cash flow went relatively flat, indicating that the bulls were holding their ground and that accumulation was taking place. However, since the two-week rally that began at the May price low, cash flow has been rather tepid, and was even flat during the first week of the rally.
It is probable that energy stocks have completed a medium-term correction and are poised to move higher, but the lack of sponsorship and overhead resistance warn that we could see a partial retracement of recent gains, particularly in the Energy Service sector.
Cash flow divergences provide valuable clues that can help us prepare for price action others are not expecting, but they don't always result in the kind of price move they imply. Always wait for prices to make the expected break before acting.
My observation is that these cash flow divergences only have short-term implications. Also, it is important to remember that the Rydex sector funds only account for a small slice of the total market in a given sector, and this small picture may not be representative of the big picture.
