RYDEX RATIO WITH ONE-YEAR STOCHASTIC

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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.

This indicator measures the assets in the bullish funds compared to total assets in the bullish and bearish funds and compares that all others over the past year by using a stochastic.

A stochastic oscillator measures the current value of an indicator on a percentage basis against its values over the past "x" number of periods.  It is calculated as follows:

(current reading - minimum) / (maximum - minimum)

So, for example, if the current ratio ratio is 45%, and it has been as high as 55% and as low as 35% over the past three months, then the three-month stochastic reading would be:

(45% - 35%) / (55% - 35%) = 10% / 20% = 50

A stochastic will always range between 0 and 100.  If the stochastic is 0, then that means the current reading is the lowest of the look-back period.  If it is 100, then the current reading is the highest it has reached over the number of periods you're observing.

So, if the Rydex Ratio stochastic is high, then there is a lot of momentum flowing into the bullish Rydex funds.  Conversely, if the Rydex Ratio stochastic low, then the momentum is waning and the assets are likely flowing into the money market or bearish funds.

GUIDELINES:

When the one-year Rydex Ratio stochastic reaches 20 or below, that is an indication that there is little momentum in the bullish funds and traders are quite pessimistic - a good buying opportunity may be at hand.  Conversely, when traders are so optimistic that the stochastic reaches 80 or higher, it usually coincides with a market peak.

STATS (for the Rydex Ratio itself, not the stochastic):

ADDITIONAL RESOURCES:

Rydex mutual fund family (www.rydexfunds.com)

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