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Bears Have Hardly Budged
Chart Spotlight
by Carl Swenlin
DecisionPoint.com
June 16, 2006
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Despite a massive rally
on Thursday, the Rydex Cash Flow Ratio reflects that very few bears have
given up. The Rydex Cash Flow Ratio, an exclusive DecisionPoint.com
indicator, gives an improved view of sentiment extremes by using
cumulative cash flow (CCFL) into Rydex mutual funds rather than using
the totals of assets in those funds (which we use for the Rydex Asset
Ratio). It is calculated by dividing Money Market plus Bear Funds CCFL
by Bull Funds plus Sector Funds CCFL. While the Ratio is not necessarily
representative of the entire stock market (it only involves money in
Rydex mutual funds), it has proven to be a reliable sentiment indicator.
Our first chart shows that the Ratio is at the low end of its range, meaning that bearish sentiment is at an extreme level. Note that Thursday's rally only effected a small up tick on the Ratio, so very few bears have been shaken loose. This is bullish for the stock market because short-covering bears are like rocket fuel for rallies.
Our second chart shows how the recent rally was in fact a bounce off the bottom of a rising trend channel. That means the support, so far, has held, and that is also bullish. Additionally, most of our medium-term indicators are oversold, providing a good foundation for an extended rally.
Bottom Line: Our
primary mechanical timing model remains neutral, and it will take
continued constructive market action to turn it back to bullish. An
excess of bearish sentiment and generally oversold market conditions
provide a good setup for a rally; however, I must emphasize that
oversold conditions are very dangerous if the bull market is
transitioning to a bear market. For planning purposes, I will assume
that the rally will continue, but my market posture will remain neutral
pending a buy signal on our timing model.  © 2006 Carl Swenlin Editorial Archive CONTACT
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