December 29, 2009

The Rydex market timers are betting heavily that an end of the year bounce will materialize as the bullish and leveraged assets now exceed the bearish and leveraged assets by more than 2 to 1. See figure 1, a daily chart of the S&P500 with the ratio of bullish and leveraged assets to bearish and leveraged in the lower panel.

Figure 1. S&P500/ Rydex Leveraged Bull v. Leveraged Bear/ daily

Now remember the Rydex market timers are only a representative sample of all market participants, but we should note that the ratio of leveraged bulls to leveraged bears, which is greater than 2 to 1, marked every short term high in the S&P500 going back to mid - June. These are highlighted by the maroon vertical lines.

One must assume that market participants are expecting higher prices. As we know, what we expect and what we get are often two different realities when it comes to the market. Our expectation is for higher prices, but the market (or person at the buy button) didn't get the memo this week. Volume is light, and the price action is moribund and random.