rydex beta chase description

Each weekday morning by 3:00 AM EST for the previous day's activity. Rydex does not release their data until late in the evening or early the next morning, so there will sometimes be an even longer delay with this data.

The Rydex family of mutual funds (www.rydexfunds.com) has a selection of funds that cover broad indices as well as narrower subgroups. These funds are popular with market timers, as some of them are highly leveraged (as much as two-to-one, so for example a 1% move in the S&P would correspond to a 2% move in the fund), and the Dynamic funds can be entered or exited intraday. The most popular funds are based on the S&P 500 and the Nasdaq 100. Rydex makes the asset levels of these funds available to the public each evening, and by observing where these active traders are placing their money, we can get a handle on their sentiment.

When the majority (i.e. the public) recognizes a trend, they tend to place their money in the highest-beta stocks or indexes in order to capitalize on what they think will be higher prices. For those of you unfamiliar, ''beta'' is a term typically used to show a stock's correlation with an index based on historical performance. For example, if a stock of a beta of 2, then if the S&P went up 1%, the stock should go up 2%.

If a stock has a beta of -1, then if the S&P went up 1%, the stock should go down 1%. Most betas tend to be somewhere between 0 and 1, although many tech stocks have betas greater than 1, and "safe"' stocks usually have betas closer to 0.

It is possible to have a negative beta (meaning the security will typically move counter to the index), which some of the Rydex bear funds have. As an example of what types of funds have certain types of betas, here is a sampling of a few extreme cases from the Rydex family:

FUND	TYPE OF FUND	BETA
URSA	S&P SHORT FUND WITH NO LEVERAGE	-1.01
PRECIOUS METALS	INVOLVED IN VARIOUS ASPECTS OF PRECIOUS METAL PRODUCTION	0.26
HEALTH CARE	INCLUDES PHARMACEUTICAL COMPANIES	0.27
TITAN	S&P LONG FUND LEVERAGED 2-TO-1	2.03
ELECTRONICS	INCLUDES SEMICONDUCTOR COMPANIES	2.42

We have created an index from the Rydex information which compares the momentum of assets flowing into the highest-beta funds to the momentum of assets going into the lowest-beta (or negative beta) funds. Those funds which had a beta close to 1.0 were ignored. The index is weighted by the beta of the funds, so that those funds with the highest beta get the highest weighting.

This should serve to appropriately capture the amount of speculation flowing into the various funds, relative to each other. The index should spike higher if traders are buying funds with high beta and/or pulling assets out of low beta funds. This would indicate that the majority of the traders (or the majority of assets, anyway) felt that the market was headed higher and thus chose to put their money into the highest-beta funds. It would be a measure of complacency or optimism. On the other hand, if the index was low, then that would show a greater momentum into low-beta, or "safe" funds, and would be a relative measure of fear or uncertainty.

This index has the capability to really reflect the psychology of the moment. For example, the highest spike in the history of the indicator - in March of 2002 - occurred when the general sentiment among traders was that we had suffered a retrace to the September lows, and were now ready to exceed the January high.

When we approached that level, the beta chasers really took charge and shifted their assets into the highest-beta funds. When new highs didn't materialize, the momentum quickly shifted out of those funds. Likewise, in late October 2002, the talk was all about a successful retest of the July lows. When it appeared that we were going to exceed the Augusts highs (actually, we did on the Nasdaq), then the momentum once again flowed to the highest-beta funds, spiking the Beta Chase Index higher. Not surprisingly, lower prices soon followed.

Since peaks in the market often coincide with speculative excess, this indicator seems to be better at spotting possible peaks than troughs in the market. When the Index reaches a high extreme of around 2.8 or higher, it means that speculation is beginning to exceed its normal trading range, and that usually spells trouble for the market (especially in the context of a downtrend).

Conversely, we normally see an Index reading somewhere around 1.0 when prices have fallen and the Rydex timers are more concerned with falling prices than catching the next wave higher. Not surprisingly, higher prices are often the result.

The chart below shows the typical market pattern after the Beta Chase Index peaks near an extreme. We can see from that chart that in March 2002, when the market was challenging the January highs, speculation was running rampant, as Rydex timers were moving assets heavily into the highest beta, or most speculative, funds, while pulling assets out of the safer, low-beta funds.

Conversely, right before that rally started, the timers had become so uncertain of future events that they were showing the opposite behavior - pulling assets out of the highest-beta funds, and moving them to the lower-beta, or safe, funds that correlate less to general market movements. Once that activity reached an extreme, the market had some difficulty retaining its downward trajectory and ended up leading to the nice rally into March.

Although this is a real example and points out the value of following this information, we do not mean to intimate that the market ALWAYS peaks when the Beta Chase Index is high, or troughs immediately after the Index reaches 1.0 or below. It is a guideline and not a trading system unto itself.

In other words, we should expect a reading under .1 or over 3.7 approximately 13 times per year. Since such a reading would be relatively unusual, it suggests that we may be seeing an unsustainable trend. These figures assume a normal distribution curve.