RYDEX MONEY MARKET

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APPLICABLE TIME FRAME(S):  

INTERMEDIATE

UPDATE SCHEDULE:

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.

EXPLANATION:

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.

We want to see how much money is flowing into the money market fund at Rydex.  When traders become uncertain about the future of the market, they often shift their funds into a "safe" place that is essentially unaffected by the movement of the equities market.  On the other hand, when traders are quite confident of market direction, they usually pull their money out of the money market and put it to work in funds that would benefit from that movement in the market.  We most often see this when prices are rising and trader become so optimistic that they move money out of the money market and into the bullish funds.

GUIDELINES:

When assets in the money market reach 50% of total assets, that is often an indication that traders are unsure of market direction (or fearful of where it may go), and is a good indication that fear is prevalent and a good buying opportunity may be at hand.  Conversely, when traders are so optimistic and sure of themselves that money market assets account for less than 35% of total assets, it usually coincides with a market peak.

The chart below shows two occurrences of money market assets reaching extremes.  In September 2001, after the markets re-opened, there was a large shift of funds into the money market since so many traders were unsure of what would happen after the terrorist attacks of 9/11. 

This uncertainty was a good indication that the fear of continually falling prices had reached an extreme, and higher prices soon followed.  At the peak in early December 2002, traders had become so confident that the country was on the mend and the Fed was going to do everything it could to help the economy along, that money market assets dipped to nearly 30% of total assets.  This confidence was unjustified as the market immediately turned south.

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 dearth of money market assets, or troughs immediately after money market assets reach 50% of total assets.  It is a guideline and not a trading system unto itself.

STATS:

*Standard Deviation.  See below...

68% of readings (1 standard deviation) should be between 36% and 46%

95% of readings (2 standard deviations) should be between 31% and 51%

99% of readings (3 standard deviations) should be between 26% and 56%

In other words, we should expect a reading under 26% or over 56% 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.

ADDITIONAL RESOURCES:

Rydex mutual fund family (www.rydexfunds.com)

© 2005  Sundial Capital Research, Inc.  All Rights Reserved.