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Comfortable Comparisons


Feeling comfortable? You're not alone...


A Minyan forwarded a couple of charts to Toddo this morning, and I thought I would make a few comments about them. First, the charts:

The top pane shows the S&P 500.

The second pane is something called the Rydex Stochastic, which looks at how aggressively traders in the Rydex funds are shifting their money into the long-side index funds. This indicator will go higher the more bullish these traders become, particularly if they are moving money into the leveraged long funds that Rydex offers.

The third pane is what I call the SPY Liquidity Premium, and is something I have discussed here before. This measure looks at the volume in SPY (the S&P 500 exchange-traded fund) and compares it to the volume in the 500 component stocks in the index. If traders are heavily favoring SPY over the component stocks, then it is a sign of uncertainty and normally becomes extreme near market lows. I have flipped the scale on this chart, so currently the indicator is actually very low, telling us that traders feel no urgent need to escape to the relative liquidity of SPY.

The fourth pane is the QQQ Liquidity Premium. It is the same concept as the SPY measure discussed above, but compares volume in QQQ to the 100 underlying stocks in the Nasdaq 100.

The red dots on the chart highlight those times all three of the indicators lined up in extreme territory over the past year. We can see that when traders became as confident as they are now, the S&P generally had difficulty moving substantially higher, at least in the short-term. Contrast that to March and May of this year, when all three were at their opposite extremes.

These are only three measures, but it is a good representation of why I am inclined to become much less long the closer we are to the top of the recent trading range. I feel that we will see some fairly wide swings the rest of the year, overall making mild upside progress, and my intention is to use these oscillating-type indicators to increase and decrease my exposure as appropriate. As always - not advice, just a thought process.

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