Tuesday, August 10, 2004

Last night's Rydex fund asset flows highlighted the dramatic change in investor psychology we're now seeing.  On a scale unmatched since last August, these traders pulled more than $130 million out of the bullish funds and into the bearish funds, despite the broader market being up on the day.  This is one of the largest bearish-leaning shifts on a positive day in four years.  The last time we saw such a thing was August 6, 2003, which was pretty much the end of the decline last year. This change in behavior is readily apparent in our Rydex Enthusiasm measure, which is the lowest since last September (this indicator measures the asset flows compared to market performance, with a low reading meaning traders are "irrationally" pulling money out of the market on up days or more than they "should be" on down days).  Further confirmation is evident in our Beta Chase index, which at 0.28 is at its lowest point since March 11th and February 2003 prior to that.  A reading that low essentially means that Rydex traders are about 3.5 times more likely to invest in a "safe" fund than a "risky" fund, a complete about-face from what we saw on July 1st. Also notable is that odd lot short sales on Friday came in at 2.59 million shares, by far a new all-time record.  As a percentage of total odd lot sales, shorts came in at over 18%.  We would have to go back to March/April 2001 (at the lows) and March 1996 prior to that to see more extreme readings. There is more uncertainty regarding what the Fed may due today than I can remember in some time, so the market reaction could be quite violent and unpredictable.  We have seen a substantial shift in psychology in just a few short days, and so I continue to believe we will see a low of some import in the next few weeks.  With the readings we have seen over the past two days, I am now becoming increasingly convinced that it will be sooner rather than later. 2:35:55 AM