The bears have hardly budged

Despite a massive rally on Thursday, the Rydex
Cash Flow Ratio reflects that very few bears have given up. The Rydex Cash Flow
Ratio, an exclusive indicator, gives an improved view of sentiment extremes by using cumulative cash
flow (CCFL) into Rydex mutual funds rather than using the totals of assets in
those funds (which we use for the Rydex Asset Ratio). It is calculated by
dividing Money Market plus Bear Funds CCFL by Bull Funds plus Sector Funds CCFL.
While the Ratio is not necessarily representative of the entire stock market (it
only involves money in Rydex mutual funds), it has proven to be a reliable
sentiment indicator.

Our first chart shows that the Ratio is at the low end of its range, meaning
that bearish sentiment is at an extreme level. Note that Thursday’s rally only
effected a small up tick on the Ratio, so very few bears have been shaken loose.
This is bullish for the stock market because short-covering bears are like
rocket fuel for rallies.

Our second chart shows how the recent rally was in fact a bounce off the bottom
of a rising trend channel. That means the support, so far, has held, and that is
also bullish. Additionally, most of our medium-term indicators are oversold,
providing a good foundation for an extended rally.

Bottom Line: Our primary mechanical timing model remains neutral, and it
will take continued constructive market action to turn it back to bullish. An
excess of bearish sentiment and generally oversold market conditions provide a
good setup for a rally; however, I must emphasize that oversold conditions are
very dangerous if the bull market is transitioning to a bear market. For
planning purposes, I will assume that the rally will continue, but my market
posture will remain neutral pending a buy signal on our timing model.

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, 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.