Friday, December 30, 2016

Weekend thread



Rydex Bear Flow at an extreme going back 5 years..... careful out there on the long side heading into 2017.

Rydex Bullish Flow explanation courtesy of Sentimentrader.com:

Time Frame: Medium-Term

Update Schedule: Daily

Construction:

The Rydex family of mutual funds has a selection of funds that cover broad indices as well as narrower subgroups. These funds are popular with market timers, as some of them are highly leveraged.
The most popular funds are based on the S&P 500 and the Nasdaq 100. Rydex makes the asset levels of these funds available to the public each evening, and by observing where these active traders are placing their money, we can get a handle on their sentiment.
We want to see how much money is flowing into the bullish Rydex funds. It would make sense to weight those funds depending on the leverage involved. If $100 million flows into the OTC fund, then we can assume that traders are optimistic on the Nasdaq. But if that same $100 million instead flows into the Velocity fund, which has 2-to-1 leverage, then we can safely assume that these traders are even more optimistic than if they had bought the OTC fund (which does not use leverage).
Therefore, we weight the Velocity fund flows twice as much as the OTC fund flows to account for this leverage. These fund flows are quite noisy, and looking at the day-to-day fluctuations does not seem to be as effective as taking a longer-term view. This indicator measures the amount the 10-day moving average of the percentage of assets in the bullish funds deviates from the 50-day moving average. It gives us a good picture of how optimistic or pessimistic this group of traders is on an intermediate-term basis.
Like all contrary indicators, when these traders become so optimistic that the asset flows into the bullish funds soar higher, it is usually a good sign that any up move is likely to be short-lived, and most likely we will see declining prices. By the time these traders recognize a trend and shift their assets to benefit from it, it is usually too late.
When the 10-day average of the bullish asset flows pulls more than 20% away from the 50-day average, it has been an effective "heads-up" that these market timers have become extreme in the shifting of their assets.

Friday thread