rydex bond bull ratio description

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.

In addition to the popular stock index funds, Rydex carries two funds based on the Long Treasury Bond (30-year). The Bond fund's benchmark is 120% of the daily price movement of the current Long Bond. The Juno fund's benchmark is -100% of the daily price movement of that same bond. For example, if the price of the current 30-year bond increases by 1% on any given day, then the Bond fund should rise 1.2% while the Juno fund should DECREASE by 1%.

FUND	STRATEGY	INDEX	CORRELATION*
BOND	LONG	30-YEAR BOND	+1.2%
JUNO	SHORT	30-YEAR BOND	-1.0%
*If the 30-year Treasury increases by 1%, then the Bond fund should increase by 1.2%. Conversely, the Juno fund should DECREASE by 1%.

To get a handle on the sentiment of bond traders, we want to see how much money is flowing into the bearish Rydex Juno fund as opposed to the bullish Bond fund. This indicator measures the amount of total assets invested in bonds that are in the bullish fund. For example, let's say there is currently $50 million invested in the Bond fund and $140 million in the Juno fund. The Bull Ratio would be:

On this day, the ratio of funds in the bullish Bond fund is 26% of total assets invested in the bond funds.

Like all contrary indicators, when these traders become so optimistic that the Bull Ratio becomes very high, it is usually a good sign that any further price rise in the 30-year Treasury 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 these traders shift enough assets that the Bull Ratio reaches 85% or more, then we can safely say they are becoming optimistic to an extreme, and it will be difficult for the bond market to retain its momentum. Conversely, readings below 43% or so show a heightened level of uncertainty or pessimism, and significantly lower prices are unlikely.

The chart below shows two occurrences of the Bull Ratio reaching extremes. In April 2000, the bulls on bonds were quite persistent, keeping the Bull Ratio elevated for nearly a month. Even as bond prices declined, and interest rates rose, these traders were optimistic that higher prices were imminent. It was not to be, as bonds staged a rapid decline into May. By that time, these bond traders had given up the ghost, and began switching their assets into the Juno fund at a rapid clip. By mid May, the Bull Ratio declined to under 40%. This coincided with a low in bonds, which rose steadily for the next three months.

Although this is a real example and points out the value of following this information, we do not mean to intimate that the Long Bond ALWAYS peaks when Bull Ratio is at a high level, or troughs immediately after the ratio drops below 40%. It is a guideline and not a trading system unto itself.

In other words, we should expect a reading under 22% or near 100% approximately 13 times per year. Since such a reading would be relatively unusual, it suggests that we are seeing an unsustainable trend. These figures assume a normal distribution curve.