Sentiment Not Bullish Enough for Top
The Rydex Cash Flow Ratio is calculated by dividing the cash
flow for bear plus money market funds by cash flow into bull funds. As the Ratio
index moves between its trading range extremes, we can gage the amount of
bullish or bearish sentiment in the stock market. See the chart below. In June
the Ratio hit a level that signaled that an important price low had been hit,
and, even though the S&P 500 has rallied about 14% since then, the Ratio only
traveled about half the distance to the overbought side of its range (red line),
indicating that investors still have not fully accepted the reality of the
rally.
At first it was the bears that had refused to give up, but the following chart
shows that, while the bears have since retreated, the rally has failed to
recruit a sufficient number of bulls to drive the Ratio to bullish extremes.
The following table shows the results of our primary timing model as it is
applied to a broad range of market indexes and sectors, and those results are
unanimously and robustly bullish. Until those signals start switching to neutral
(it is much too soon to get sell signals), I will not be concerned about the
viability of the rising trend.
This table is updated for subscribers every trading day in the Decision Point
Alert Daily Report.
Bottom Line: The market is overbought as measured by many of our internal
indicators, and it should experience a small correction or consolidation, but
the Rydex Cash Flow Ratio has not reached a level where we should be concerned
about a major top.
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your
tactics if conditions change.
Carl Swenlin is a self-taught technical analyst, who has been
involved in market analysis since 1981. A pioneer in the creation of online
technical resources, he is president and founder of
DecisionPoint.com, a premier
technical analysis website specializing in stock market indicators, charting,
and focused research reports. Mr. Swenlin is a member of the
Market Technicians Association.