(This is an excerpt from recent blogs for Decision Point subscribers .)
The Rydex Cash Flow Ratio gives a view of sentiment extremes by using cumulative cash flow (CCFL) into Rydex mutual funds. It is calculated by dividing Money Market plus Bear Funds CCFL by Bull Funds plus Sector Funds CCFL. (To read more click here .) While the Ratio shows that Rydex investors are becoming more cautious, deeper analysis of CCFL components shows that the bears are still reluctant to engage.
The following chart of the Ratio shows that sentiment has been becoming less bullish, and the Ratio has reached a level that marked an important market bottom in June. If the bull market is still viable, we could be near an important low.
Looking deeper into the composition of the Ratio, the chart below shows that cash has been flowing out of Bull and Sector funds, and it has been flowing into the Money Market Fund. Virtually no cash has moved into Bear Funds in the last three months. The bears are in hiding.
Conclusion: Earlier this week we observed that Investors Intelligence percentage of bulls has become significantly smaller, but the percentage of bears has not increased to a level we would normally see at an important low. The Rydex Cash Flow Ratio confirms that observation.
Important bottoms can appear when we don't expect them, so we will not be so bold as to say it can't happen about now; but bottom picking is a dangerous game, and we would want to see the bears becoming much more aggressive before we seriously begin to expect an end to this decline.
Technical analysis is a windsock, not a crystal ball.