Rydex Ratio Reaches Significant Level

As we've mentioned many times in the past, the Rydex Ratio is a very important component to our measurement of investor psychology.  As of yesterday, Rydex traders now have over 20% more bearish assets than bullish assets.  You can see the significance of this level in the chart below.

Click on image to view larger chart.

Also, by looking at the chart below, you can see the similarity between last summer's correction and today's market by looking at the S&P 500 and the VXO.  If this rhyme from last year is going to come close to being recreated, then we need to have this decline slow down here, maybe a slightly lower low from yesterday's close, but not much more.  Then, we'll need a rally in the ensuing weeks.  If this is a close correlation, then we still have 8-12 more weeks of a volatile stock market, but not a lower low than the one being made here.  You can see the similarity in the chart below.

Click on image to view larger chart.

Also, the lower volume on yesterday's panic was a good confirming sign that selling pressure is being reduced.  Our reverse head-and-shoulders pattern would be closely synchronized, in our opinion, with the Thanksgiving deadline for a definitive plan from the Super Committee.

This is not an exact science, but you can see history is on the side of a very bullish resolution to this panic attack.

Click here to read today's complete Market Comment.

Don Hays

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