Short-term Outlook:  Neutral  As of Dec 17, 1098 SPX

Equity Indicators - Updates and Extremes

Rydex Beta Chase Index

One of the areas we've focused on over the past week or so is the flow of funds among the various Rydex mutual funds.  More and more, we've seen these traders concentrate on the long index funds (as opposed to the short, or inverse, index funds) heading into the new year.

It's clear from the Bull / Bear Ratio that these traders are heavily invested in the long funds - to a degree, in fact, that has preceded a short-term pullback every time it has reached this level since March.

Among sectors, we're now also seeing a grab for the highest-beta funds.  Beta can be associated with risk as the highest-beta funds tend to exhibit the most volatile moves relative to the market as a whole.  And right now, Rydex traders are nearly 7 times more likely to trade a "risky" fund as they are a "safe" fund.

Even during the strong bull move since March, when it has reached this degree of speculation, the market has either pulled back in the short-term, or any further gains were subsequently given back.

Small Trader Options Volume

For each of the past two weeks, we've highlighted a disturbing lack of protective put buying among options traders, specifically the smallest of traders.

While there may be some seasonality involved with that, each time in the past decade that we've seen exceptionally low put buying near the end of a year, the following January showed a negative return.

The Wall Street Journal had an article this weekend that touched on options trading by individual investors, though their take was mostly anecdotal and suggested that investors have moved heavily into selling call options.  If so, that would suggest a relatively healthy display of concern and from a contrary perspective may be bullish for the market.  The article states that some online brokers, like Schwab, have 84% of their customers selling covered calls.  But there is no context to that - is 84% high or low?

The chart below breaks down all opening options transactions for trades of 10 contracts or less, so we're really talking about the smallest of traders.  We can see that over the past two years, the choices of strategy haven't moved too much.  There was a brief love affair with selling call options at the beginning of last year, but not so much anymore.

Call buying is by far the most popular activity.  And, as we know, buying the protection of puts is the least.  This doesn't support the idea that small traders are all that concerned about protecting their profits of the past nine months.