The following is an excerpt from the August 2, 2013 blog for Decision Point subscribers.
The Rydex Cash FLow Ratio is one of the sentiment indicators we track, and currently it is showing that investors are unusually reluctant to commit money to the current rally.
The Rydex Cash Flow Ratio 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.
After reaching the bullish edge of the Ratio scale at the May market top, we can see how sentiment became quite bearish during the June correction. The July rally has taken the market to new, all-time highs, but, so far, investors have been holding back.
Analyzing the data more closely, we can see that cash flow into bull and sector funds has not been enthusiastic, and bear fund cash flow shows that the bears have not yet capitulated. A note of encouragement is that the rally is not that old -- if it continues, positive cash flow could quickly catch up.
Conclusion: The Rydex Cash Flow Ratio shows that investors abandoned the market during the June correction, more than the size of the correction ultimately warranted. Their reluctance to commit to the rally may be simply a case of not enough time for sentiment to change, and a reflection of how the "wall of worry" works. But in the end, money must be committed to the market to push prices higher, and so far, that isn't happening to any large degree.
