The Rydex Ratio is Starting to Flip

As you are well aware, our Psychology Composite brightened our day on May 22nd when it moved to a P3 rating.  The only thing that we were bothered by was that one of our favorite measures of "dumb" psychology, the Rydex Ratio, was still stubbornly far too bullish.  We cited the observation that often these historically very dumb traders were the last to give up the ship, but when they did, they produced quick flips from bullish to healthy bearish postiions.  It is too soon to totally stand up and shout, but yesterday they started the process of "flipping."

As you can see in the chart above, these traders are still net bullish; however, they have dipped under what our studies show is the red zone back into a more neutral 16.9% bullish posture.  Our "druthers" would be for this ratio to come back slightly into a net bearish posture - under the 0 line, but with so many of our other Psychology Composite indicators giving strong signals, this shift is good news.

Don Hays

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