RYDEX BEAR FUND ASSET FLOW
APPLICABLE TIME FRAME(S):
Each weekday morning by 3:00 AM EST for the previous day's activity. Rydex does not release their data until late in the evening or early the next morning, so there will sometimes be an even longer delay with this data.
The Rydex family of mutual funds (www.rydexfunds.com) has a selection of funds that cover broad indices as well as narrower subgroups. These funds are popular with market timers, as some of them are highly leveraged (as much as two-to-one, so for example a 1% move in the S&P would correspond to a 2% move in the fund), and the Dynamic funds can be entered or exited intraday.
The most popular funds are based on the S&P 500 and the Nasdaq 100. Rydex makes the asset levels of these funds available to the public each evening, and by observing where these active traders are placing their money, we can get a handle on their sentiment. The fund flows are available late each evening (usually after 11:00pm EST) by calling 1-800-717-7776.
Here is a table of which funds comprise the bearish asset flows:
We want to see how much money is flowing into the bearish Rydex funds. It would make sense to weight those funds depending on the leverage involved. If $100 million flows into the URSA fund, then we can assume that traders are pessimistic about the prospects of the S&P 500. But if that same $100 million instead flows into the Tempest fund, which has 2-to-1 leverage, then we can safely assume that these traders are even more pessimistic than if they had bought the URSA fund (which does not use leverage). Therefore, we weight the Tempest fund flows twice as much as the URSA fund flows to account for this leverage.
These fund flows are quite noisy, and looking at the day-to-day fluctuations does not seem to be as effective as taking a longer-term view. This indicator measures the amount the 10-day moving average of the percentage of assets in the bearish funds deviates from the 50-day moving average. It gives us a good picture of how optimistic or pessimistic this group of traders is on an intermediate-term basis.
Like all contrary indicators, when these traders become so pessimistic that the asset flows into the bearish funds soar higher, it is usually a good sign that any move down is likely to be short-lived, and most likely we will see rising prices over the coming weeks. By the time these traders recognize a trend and shift their assets to benefit from it, it is usually too late.
When the 10-day average of the bearish asset flows pulls more than 20% above from the 50-day average, it has been an effective "heads-up" that these market timers have become extremely pessimistic in the shifting of their assets, and we may soon see a market rally. Conversely, if they are optimistic enough that the 10-day average falls 10% or more below the 50-day average, then we often see declining market prices shortly thereafter. The red horizontal line on the chart is the -10% guideline (too much optimism - bearish), while the green horizontal line is the +20% guideline (too much pessimism - bullish).
The chart below shows two occurrences of the bearish asset flow reaching extremes. In late November 2001, after the recovery from the September lows, there was a mass exodus from the Rydex bear funds, as traders became quite optimistic that we would see higher prices.
Eventually, it reached an extreme and the market had a very difficult time sustaining any upside momentum. Near the February 2002 low, the fund flows had reversed and we were now seeing a large shift in assets to the bearish funds. There was so much of a shift that the 10-day average went nearly 30% above the 50-day average. This pessimism was not rewarded, as the market soon reversed course and headed higher.
Although this is a real example and points out the value of following this information, we do not mean to intimate that the market ALWAYS peaks when there is an exodus from the bearish funds, or troughs immediately after the 10-day average rises more than 20% above the 50-day average. It is a guideline and not a trading system unto itself.
*Standard Deviation. See below...
68% of readings (1 standard deviation) should be between -6% and 20%
95% of readings (2 standard deviations) should be between -19% and 33%
99% of readings (3 standard deviations) should be between -32% and 46%
In other words, we should expect a reading under -32% or over 46% only between 2-3 times per year. Since such a reading would be highly unusual, it suggests that we are seeing an unsustainable trend. These figures assume a normal distribution curve.
Rydex mutual fund family (www.rydexfunds.com)
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