On Monday, traders in the Rydex family of mutual funds reached a near-record level of bullishness.
The chart below shows the Bull Ratio for all the index funds. This is the total assets in the long funds for the S&P 500, Nasdaq 100, DJIA and Russell 2000 divided by the assets in the inverse funds for those same indexes.
As of Monday, there was $4 invested in the long funds for every $1 invested in the inverse funds. The only other time since 2004 that matched this level was May 2, 2011.
As of Wednesday, total assets invested in the inverse funds at the Rydex family fell to $291 million. That ties it for the lowest all-time, along with January 30, 2001 and May 2, 2011. Both dates were good times to own those funds.
Overall volume on the major exchanges has been low, and that’s especially true among many of the exchange-traded funds that profit on a market decline.
The S&P 500 went the entire month of January without a meaningful drop, so traders are not seeing much point in hedging against seeing one anytime soon.
The chart below shows the volume in inverse ETFs. We can see that the other times this hedging volume was so low, stocks got hit soon afterward. Even if we compare this volume against total composite NYSE volume, it’s almost exactly the same picture.
There has been a lot of concern over the behavior of the Baltic Dry Index (BDI). This is an indicator we have discussed several times over the past few years, usually with very mixed results in terms of its predictability.
It’s getting attention now because it has cratered 40% in a few weeks, and is trading at a two-year low.
Many consider the BDI to be a better predictor of China’s Shanghai Composite index than the S&P 500, so the table below shows how the Composite performed in the months after the BDI collapsed to a two-year low.
As we can see from the table, results weren’t too bad, in fact they were a bit better than random. To see the same results for the S&P 500, click here for the table.
If we just look at the largest monthly declines in the BDI, then the figures change. In those cases, stock market performance in the S&P 500 and Shanghai Composite are a bit worse than random.
If we combine the two and look for large monthly drops to a two-year low, then stock market performance was mixed-to-poor during the next 1-3 months, but then good afterward. We wouldn’t read a whole lot into this indicator’s recent decline.
A current negative for stocks is a spike in the OEX Put/Call Ratio.
A jump in this ratio means that traders have been busy trading put options on the S&P 100 index, the largest companies in the S&P 500. These options are normally traded by more experienced traders.
With that put/call ratio high and the Equity Put/Call Ratio low, the spread between the two is at an extreme. This is kind of a poor man’s proxy for smart money (OEX options) versus dumb money (equity options).
Such a wide disparity between the two has not been a good sign.
One mitigating factor now is that the Open Interest Ratio for OEX options isn’t at an extreme, meaning that there aren’t a whole lot more put options currently outstanding relative to call options. At prior peaks, we usually saw both the OEX Put/Call Ratio and the Open Interest Ratio at extreme levels together.
The holiday weeks likely prevented some investors from taking part in their usual stock market polls. Or maybe they were just feeling good about 2012.
Whatever the reason, the latest survey from the American Association of Individual Investors showed that only 17% of respondents felt the stock market will be lower six months from now.
That’s the 2nd-lowest percentage of bears in six years.As we highlighted for subscribers, however, since 1987 this actually isn’t all that unusual. And the S&P 500′s performance in the weeks following such low levels of bears wasn’t that bad.
It wasn’t great, either, but at least not as bad as it might seem from a contrary point of view.