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Chasing Beta the Rydex way


Aren't you supposed to be bullish?!


One of my favorite sentiment tools is the asset levels of the funds in the Rydex mutual fund family. In a stroke of marketing genius, they release these asset levels to the public, and they have become an increasingly useful read on investor sentiment, as I've noted several times.

One way of looking at the data that I have found to be particularly helpful is something I have dubbed the "Beta Chase" index. This index looks at all the funds Rydex offers, and monitors the flow of money between low-beta (or "safe") funds and high-beta (or "risky") funds. When investors pull in their horns and transfer money from risky funds to safe funds, then the Beta Chase index will be low; when risk tolerance increases, so will the Beta Chase index as traders "chase" high-beta stocks and funds. It is when the index spikes up that it is most reliable, as it shows a short-term speculative fervor that has nearly always preceded a short-term market pullback.

Currently, as the chart below shows, the index went over 10 last night. Essentially, that means that risky funds are preferred 10 times more than safe funds. I have highlighted in red other times the index has spiked higher over the past year, and you can see that we normally saw a pullback of at least a couple of days afterwards. Obviously we have many cross-currents over the next couple of days, so I am wary of being aggressive in either direction, but this isn't a positive sign for the bulls (short-term anyway).

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No positions in stocks mentioned.

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