Using the Rydex Bull/Bear Ratio to Gauge Sentiment
Investor sentiment has been seen by many market observers as a useful way to determine if the stock market is overvalued or undervalued. Traditionally, polls of market participants have been used to measure the relative bullishness of investors. The problem with polling is that it’s subjective and prone to staleness. It’s probably more useful to obtain a real-time gauge of which direction investors are voting with their real money.
Rydex has a variety of funds which investors can use to make bullish and bearish bets. Rydex also adds leverage to the mix enabling investors, for instance, to capture double the move up in the S&P 500. The Rydex 2X S&P 500 ETF (RYTNX) “seeks to provide investment results that will match 200% of the performance of the S&P 500, before fees and expenses, on a daily basis.” Rydex also has an inverse 2X S&P 500 ETF (RYTPX), so investors have an equal opportunity to wager on a down market.
At their website, Rydex has enabled investors the ability to see the total assets of their open end mutual funds on a daily basis. Some technically inclined participants have used a ratio of the bull/bear fund’s assets to concoct a sentiment ratio. Obviously, at market tops there will be more relative assets in the bullish fund than the bearish version and vice versa.
In the next few days, I’ll be studying this ratio and give my interpretation of its current reading. I’ll also be considering incorporating the ratio into my fear index.