Rydex Ratio Bullishness has Moved back Up

Today, let's look at one of our technical indicators (on the Psychology side) that we've been highlighting much of this year - the Rydex Ratio.  This indicator measures the sentiment of the Rydex traders, and today their at their most bullish stance of the last few years; however, you have to go back to 1998 and 2000 to find them with more bullish sentiment.
No indicator can be depended on for sole advice.  You have to look at the entire body of evidence, and that body of evidence now has our Psychology Composite at P4.  But with that said, the Rydex Ratio is the best of the best, so let's look at the evolution and what this means.  They seem to be roaring bullish, and that is not good...or it hasn't been in most cases in the past.
To begin with, Rydex speculators have been pushed around a lot in recent years.  They follow relative strength.  When the market is hot, they are hot, and vice versa.  That is one reason it is such a good indicator.  But for the last 10 years, and especially for the last 3 years, this discipline has been almost a mirror image of what history shows its resulting performance.  If you have been buying the bullish trend, you have been suffering, and vice versa.  So it is my thought that the Rydex speculators are pretty "gun shy" and that their actual numbers have dwindled greatly.  They have pulled back bruised and battered.  Today's reading is from those that are still left.
Let's take a look at the historical record of the Rydex Ratio back to 1998.
To begin with, let's focus on the evolution of this bullish posture since the low point on March 9th, 2009.  We had a move up right before that peak in 2010, a correction, and then another move up right before that higher-high peak of bullishness in 2011, then a correction, and now we've had that peak in 2012 right before that April to May correction.  So here we are back to that level.  This is certainly enough to make us pause.  We also see that period in 2004 after the Bush election, when the ratio hit a peak, but the stock market only had a series of mini-corrections in its aftermath.  To get back to today's level, we have to go back to that period before the peak in 2000 to find higher bullishness, which served to start the exodus of the public investor from stocks.  In that instance, if you bailed out of stocks at today's level, you missed a big portion of the rally in 2000.
The bottom line is that this signal tells us to walk a little slower on new investments, but we cannot ignore the amazing bullishness of our Monetary and Valuation Composite signals.  However, we still have some other shorter-term indicators that are suggesting that our short-term bullishness needs to be at least neutered.
Don Hays
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