Findings on the Rydex Bull/Bear Ratio Sentiment Gauge

By on May 31, 2011

In a recent post the idea of a real-time sentiment gauge using the net assets in the Rydex leveraged 2X S&P 500 funds was discussed.  A search of the web disclosed that CXO Advisory had performed an in-depth examination of the statistical nuances of this sentiment reading back in January 2010.  CXO Advisory found there was very little useful correlation in this gauge for profitable trading both on a short-term and long-term basis.

I decided to perform my own abbreviated analysis based on observations since the market bottom in 2009.  I looked at 8 examples of the index since March 9, 2009.   Each date in the chart below marks a significant high and low in the S&P 500 over the past two years.

A cursory observation of the data shows the assets in each of the funds fluctuate wildly.  This may indicate that these funds are used for speculation, or gambling, by large institutions.

An examination of the ratio is disheartening for anyone who wants to use it as a sentiment gauge.  At the March 9, 2009 bottom the reading of bull/bear assets is 0.67, which is higher than the 0.38 reading on November 5, 2010; after the market’s long bullish run.   

The recent top on April 29, 2011 had a lower reading than after the market fell about 2.5% over 3 weeks, when it would should have been vice versa. 

Any further study of the Rydex Bull/Bear Ratio is likely an exercise in futility, although there may exist a useful ratio when comparing other funds.

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