Rydex Ratio Reflects Very Bullish Sentiment

247Bull.com Editor: It is likely that Ben Bernanke’s recent testimony before Congress was designed to take some of the heat out of US equity markets which rallied from a November 2012 low of 1,343 on the S&P 500, to 1,687 on 22 May, a rise of more than 25%. However, various sentiment indicators such as the Rydex Ratio show that investors remain extremely bullish on stocks. The truth is the US economy is still walking a fine line between inflation and deflation, and recent falls in both the CPI and PPI (together with other indicators) show that deflation may be gaining the upper hand. It’s for this reason that we expect the Fed to “maintain highly accommodative monetary policy” for the foreseeable future, so while in the short-term a correction would undoubtedly be healthy for US equities, the longer-term outlook remains bullish.

As prices soar, the Rydex Ratio reflects increasingly bullish sentiment. The chart shows that the Ratio has not reached these levels for over 12 years.

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The Ratio is calculated by dividing the Money Market plus Bear Fund assets by the assets in Bull plus Sector Fund assets. Note that asset levels in the Rydex Money Market and Bear Funds are lower than they were at the 2000 price top. Bull plus Sector Fund assets, however, are only about half of what they were at the 2000 top, but it is unlikely that they will get much higher because today there are a lot more choices outside the Rydex family for making bullish bets than there were in 2000.

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The Rydex Ratio is at a level that shows extremely bullish sentiment, which is very dangerous for the market. In other articles we have remarked that the angle of ascent for prices has become parabolic, which is also very dangerous. We don’t know where the top of the current advance will be, but the fall from that top is likely to be breathtaking.

Carl Swenlin | president and founder of DecisionPoint.com

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