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11/12/2010

Rydex Cash Flow Ratio Shows Investor Reluctance

by Carl Swenlin

(This is an excerpt from Friday's blog for Decision Point subscribers.)

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. To read more click here

The chart below shows a three-year view of the Ratio. Please note that the Ratio scale is inverted to give us a more intuitive presentation of overbought and oversold readings.

Overbought readings of the Ratio can help identify price tops, but during a bull market prices can power higher through overbought conditions, as happened in 2009. In April 2010 the Ratio hit the highest level since 2005, showing the strong commitment of investors at what proved to be the final top before a correction. At the correction low in July, the Ratio reached its lowest level in 10 years, demonstrating, in my opinion, how shallow investor commitment really was.

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Now that prices have climbed back to the April high, the Ratio is barely above the oversold levels of 2009, reflecting investors' extreme caution. In my opinion this is a bullish sign and evidence of a "wall of worry" up which prices can climb. Other sentiment indicators support this interpretation.


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ABOUT LAST WEEK'S CHART SPOTLIGHT COMMENTS ON THE DOLLAR:

 Never mind! As of the time I wrote the article the U.S. Dollar Index had violated a long-term rising trend line, generating some fearsome downside projections. However, before the figurative ink was dry on the article, the index began a rally that took it back above the trend line and set it on a course to challenge the resistance of the declining tops line drawn from the 2010 top.

Chart

The situation is by no means resolved, as the index is being jammed into a corner between two strong lines of resistance and support. As a technical matter, the longest line (the rising trend line) is the strongest and the most likely to hold.

Bottom Line: I do not usually make timely updates on our Chart Spotlight articles, because that is normally reserved for DecisionPoint.com subscribers; however, I could not leave the impressions and projections of last week's article uncorrected. Last week it appeared that the dollar was headed for oblivion, but it has been quickly pulled back from the brink. And, yes, the market proved me wrong, so a reassessment was necessary.

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Technical analysis is a windsock, not a crystal ball.  

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BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association. 

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