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Whatever Happened to Buy The F'ing Dip?

This week's Chart of the Week video looks at the equity market and asks: Whatever Happened to Buy The F'ing Dip? So let's get technical.

The SP500 is off a little more than 4% from its highs, and I am sure this must have many an investor worried. Furthermore, the markets have gone nowhere in the last 3 months or since Federal Reserve Chairman, Ben Bernanke, assured us that QE would continue in perpetuity. Wasn't that the "all clear" signal back then? Oh well...

Some aspects of the sentiment picture are turning favorable (i.e., showing increasing number of bears), but others, like the Rydex asset data, continue to show too many leveraged bulls. While the Rydex market timers only represent a small segment of the investing world, their actions remain a useful window into the mindset of investors. The Rydex asset data is based upon real asset flows, and through this, we can gauge how investors are placing their bets.

This is a daily chart of the SP500. The red dots over the price bars are those times that the Rydex Bullish and Leverage to Bearish and Leveraged ratio is greater than 4. This means there are 4 times as many assets in leveraged bull funds than leveraged bear funds. Since mid May, there have been 72 trading days. On 60 of those days or 83% of the time, investors have been positioned bullishly and with leverage to an excessive degree.

These investors clearly got Bernanke's message back in May. But something is wrong. The market hasn't gone anywhere, and a lot of investors are probably underwater over this time period. But don't worry, the cavalry will soon arrive - at least that seems to be the current thinking. Despite the current down draft - if you can call a 4% drop a down draft - there are still too many leveraged bulls. Which leads me to ask: with everyone all in, where are the bulls to BTFD?

The pullback that started 4 weeks ago is marginal in the scheme of things, but there is a lot of trouble under the surface. It would really be healthier if the market got whacked more than 10%. This would really turn the bulls into bears. At present, it seems investors are poorly positioned.


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