Tuesday, August 17, 2004

Anyone who checks out our Rydex indicators each morning was probably surprised to see the Rydex Enthusiasm Index actually DECLINE yesterday.  Recall that this measures these traders' propensity to shift more money than expected into and out of the bullish and bearish funds depending on the type of day we had.  With such strong gains across the board yesterday, we should have fully expected a large shift into the bullish funds and out of the bearish ones.  However, that was not the case. Total leveraged bullish funds gained only $4.4 million yesterday while leveraged bearish funds lost a miniscule $0.7 million.  For such a good day as we had yesterday, that is a telling reflection of current sentiment - traders DO NOT believe that we have seen the lows, or else these shifts would have been very large.  One interesting side-note is that the last time we saw such hesitation after a good day was 1/31/03, which our current situation has been very closely mirroring.  If this morning's opening gap holds, though, that comparison will break down, as the S&P was never able to regain its breakdown level then. I noted in the last comment that if we got an early week rally that took us to overbought levels, it would be the first real test of a potential trend change.  We became very mildly overbought by the close yesterday (enough that stopped most previous short-term rallies over the past month), so if the downtrend is still intact this morning's gap up will be sold quickly.  It looks like we will open right above that 1080 level I had mentioned last time, so I will be watching this open with much interest.  If it is sold hard, it'll look like the same 'ol, same 'ol. 9:17:55 AM