I haven't reviewed the Rydex Ratio chart in some time, mainly because what used to be considered overbought territory became the "new" oversold territory and I wanted to see how it behaved moving forward.
A quick refresher on what the Rydex Ratio tracks. We compare the total assets in money market and bear funds to the total assets in the bull and sector funds. These numbers are gathered in the evening after the market close (hence the 9/3 readings being the most current). The smaller this ratio becomes, the more bullish the sentiment reading. Sentiment is a "contrarian" indicator; the more bullish the sentiment, the more bearish the outlook becomes for price. The idea is that, when everyone is bullish, that is when you will see the downside reversal.
Check out the chart below!
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You can see that it danced around previously overbought territory from November 2020 through the first part of 2021. However, we are now starting to see oscillation in its new post-bear market range.
Note the dotted vertical lines align with "cardinal" tops. I have also annotated a vertical line at our last all-time high for the SPX. A Rydex Ratio in overbought territory generally accompanies market tops. Currently, we are seeing one of the lowest readings on record for the Rydex Ratio. This means that participants who are "voting with their money" are extremely bullish.
Conclusion: Sentiment based on the Rydex Ratio is extraordinarily bullish given the historically low reading. Given sentiment is contrarian, there is now a bearish price bias based on "real money" trading.
Technical Analysis is a windsock, not a crystal ball.
-- Erin Swenlin
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