247Bull.com Editor: Tom McClellan, son of Sherman McClellan (the inventor of the McClellan Oscillator), once commented that there are only two fundamental factors that matter when it comes to the overall stock market. These are, how much money there is in the system, and “how much does that money want to be invested?”.
The Fed (and other central banks) is pumping massive amounts of liquidity into the financial system to keep it afloat. As a result, the broadest money supply measure, M3, is growing at just under 5% year over year, and M2 is growing at around 7.5% year over year. So there is plenty of money in the system and it has been finding its way into financial assets, pushing up the value of stocks and, (until recently) bonds.
The problem however, is that all this freshly printed money appears to be less and less interested in chasing equities. If the Rydex data is reflective of the broad marketplace and the trend continues, then this market could well be ripe for a major reversal. This supports the view that the approaching Fibonacci Time Zone will market a cyclical peak in stocks.
The Rydex Ratio is one of the sentiment indicators we use. It is calculated by dividing total Money Market plus Bear Assets by total Bull assets in the Rydex fund group. Currently, the Ratio is the extreme bullish end of the normal range, which implies that a price top is likely to arrive soon.
The chart below shows interesting aspects of different components of *Rydex funds. First, we can see that the Money Market Fund assets are dropping to levels frequently associated with price tops. This means that sideline cash is getting low.
Next, the Bull Assets have failed to expand during the last two month market rally, showing a lack of enthusiasm on the part of bulls.
Total Bear Assets have fallen to levels not seen since the 1998 market top, showing that the bears are unusually timid.
Finally, and most interesting, is that total assets in Rydex Funds have been dropping precipitously for about six months, in spite of a lively market rally. This could mean that investors are losing interest in Rydex funds and are moving their money elsewhere. I tend to believe a broader interpretation — that average investors are losing interest in the stock market because of two bear markets, a real estate crash, and the ongoing debt crisis.
Along those lines, I read some interesting statistics in a CNBC.com article about real estate. One-third of homeowners own their homes outright (no mortgage). Another one-third are underwater with their mortgages. The final one-third, obviously, have equity or are at least breakeven on their mortgages.
If we think of these groups of homeowners as potential stock investors, the group who has no mortgage are very conservative and unlikely to take on the risks of the stock market. The underwater group doesn’t have any money. And the final group may or may not have any money they want to risk. I admit that this view is strongly biased toward the negative, but it is the other side of the argument made by the bulls that there is lots of money sitting on the sidelines, waiting to pile into the market and drive prices much higher. Just a thought.
But I digress.
The analysis of the Rydex charts above lead me to believe that a significant price top will arrive within a week, maybe two.