Hmm, looks OK, but not great...
Since the time I've been lucky enough to write alongside the critters, I've outlined several of the measures I use to try to determine the current risk/reward characteristics from the long and short side. These indicators have served us well, and are consistent guides - they're not always "right", but right enough to bother following them. With the swift decline so far this year, I thought now would be an appropriate time to revisit a few of them and see what they're saying now.
The chart below outlines four of my favorites. Let's go over each of them:
Rydex Beta Chase - This indicator looks at where traders are putting their money in the Rydex mutual fund family. The lower the indicator, the more defensive these traders are. Right now, we see these traders putting about twice as much money into "safe" funds as "risky" funds, a huge switch from November and even December. This is suggesting these traders are about as pessimistic as they have been at other lows over the past year.
Equity Put/Call Ratio - This is a five-day moving average, and we're still not seeing the kind of put volume in equities that we saw previously. At each of the other tradeable lows over the past year the ratio has been at least 0.80 or higher - now it is struggling to even reach 0.70. This confirms other put/call measures I follow, all of them suggesting there is not any panic in the air.
Odd Lot Short Sales - I've written about this a couple of times already this year, as we have seen extremely unusual readings. These small-trader bets on a market decline have overtaken 7 of the top 10 readings over the past 35 years. Typically, a spike in odd lot short sales occurs about 11 days and 3% before a good market low - we're right on track there to see a low at any time.
SPY Liquidity Premium - This indicator shows us how much traders are favoring the S&P 500 exchange-traded fund (SPY) over and above the 500 individual equities in the index. The lower the red line, the more people are trading the ETF as opposed to the individual equities - a sign of uncertainty that tends to be bullish for the market. Right now, this measure is low, but not quite extreme. It is supportive of a rally, but it isn't at a place where I would give it as a reason to expect one.
Overall, then, we're seeing a few positive signs that the bulls can point to to justify their positions, but we're not seeing enough - or the types of extremes - that suggests a sustainable rally is imminent. As I noted above, these measures are certainly not foolproof. They are good guides, and it helps to have them on our side as confirmation, but they are not reasons unto themselves to enter or exit positions.
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