RYDEX BULL 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 bullish asset flows:
We want to see how much money is flowing into the bullish Rydex funds. It would make sense to weight those funds depending on the leverage involved. If $100 million flows into the OTC fund, then we can assume that traders are optimistic on the Nasdaq. But if that same $100 million instead flows into the Velocity fund, which has 2-to-1 leverage, then we can safely assume that these traders are even more optimistic than if they had bought the OTC fund (which does not use leverage). Therefore, we weight the Velocity fund flows twice as much as the OTC 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 bullish 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 optimistic that the asset flows into the bullish funds soar higher, it is usually a good sign that any up move is likely to be short-lived, and most likely we will see declining prices. 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 bullish asset flows pulls more than 20% away from the 50-day average, it has been an effective "heads-up" that these market timers have become extreme in the shifting of their assets. The red horizontal line on the chart is the +20% guideline (too much optimism - bearish), while the green horizontal line is the -20% guideline (too much pessimism - bullish).
The chart below shows three distinct occurrences of the bullish asset flow reaching extremes. In late August 2002, after the recovery from the July lows, we saw a large influx of assets into the Rydex bull funds. Eventually, it reached an extreme and coincided with severely falling prices throughout September. Near the October low, the fund flows had reversed big-time and were now extremely skewed to the bearish funds.
This did not last long, as the market soon turned course and rallied strongly into November. However, by early November the Rydex timers had once again shifted wholeheartedly into the bullish funds, and a flat/down market followed their efforts.
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 a rush into the bullish funds, or troughs immediately after the 10-day average drops 20% below 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 -17% and 11%
95% of readings (2 standard deviations) should be between -31% and 25%
99% of readings (3 standard deviations) should be between -45% and 39%
In other words, we should expect a reading under -45% or over 39% 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)
© 2005 Sundial Capital Research, Inc. All Rights Reserved.