Detrended Rydex Ratio Turns Very Bullish On 20 Year Chart
All the major equity indexes closed lower yesterday with negative internals on the NYSE and NASDAQ as trading volumes declined on both from the prior session. All closed at or near their lows of the day. We believe it to be of potentially significant import because all maintained their high-volume support levels as the market slid south throughout the day.
While we were expecting some consolidation in the markets, as noted yesterday, we were not expecting it to happen in one day.
The fact that supports are held within a rush to the exits is encouraging, in our opinion. And while most of the data remain neutral, we find the detrended Rydex Ratio (contrarian indicator) has dropped to a point showing the typically wrong leveraged ETF traders very leveraged short and at an inflection point that has been coincident with important rallies over the past 20 years.
They were leveraged long at the early January highs. So, while wild swings may continue going forward, we believe the markets are presenting an attractive buying opportunity on a selective basis.On the charts, all the major equity indexes closed lower yesterday with negative internals on lighter volume.
- While all closed at or near their intraday lows, all managed to hold their important high-volume support levels. Given the intensity of the selling, we find that encouraging.
- The consolidation we were anticipating in yesterday’s note occurred as the DJI dipped below its 50 DMA.
- No chart trends were violated, leaving all in neutral near-term patterns.
- Cumulative market breadth was also unchanged and neutral on the All Exchange, NYSE and NASDAQ.
- No stochastic signals were generated.
The data finds the McClellan 1-Day OB/OS Oscillators remaining neutral (All Exchange: -22.21 NYSE: -32.53 NASDAQ: -15.68).
- The % of S&P 500 issues trading above their 50 DMAs rose to 42%, also staying neutral.
- The Open Insider Buy/Sell Ratio slipped to 74.5 as insiders pulled back from their recent aggressive buying, staying neutral.
- However, the detrended Rydex Ratio sank further to negative 2.05 as they are now heavily leveraged short. It is now near levels seen 7 times in the past 20 years. All but one were coincident with market rallies, four of which were significant. As a contrarian indicator, it’s quite positive.
- As well, this week’s contrarian AAII Bear/Bull Ratio jumped to a very bullish 2.0, double the number of bears than bulls, while the Investors Intelligence Bear/Bull Ratio (26.7/34.9) saw the number of bears rise as bulls fell.
- Valuation finds the forward 12-month consensus earnings estimate from Bloomberg dipping to $224.39 for the SPX. As such, the SPX forward multiple is 20.0 with the “rule of 20” finding ballpark fair value at 18.2.
- The SPX forward earnings yield is 5.01%.
- The 10-Year Treasury yield rose to 1.83. We view support for the 10-Year at 1.60% with resistance at 1.93%.
In conclusion, yesterday’s slide left the support levels and trends unchanged after a massive push to the exits. The combination of the charts holding while the Rydex is neon green suggests a buying opportunity is at hand once again.
SPX: 4,435/4,587 DJI: 34,743/35,658 COMPQX: 13,918/14,524 NDX: 14,469/15,208
DJT: 15,272/15,860 MID: 2,603/2,699 RTY: 1,940/2,140 VALUA: 9,294/9,523