Is This Time Different?

The Rydex asset data continue to indicate that a market top is occurring as equities remain under distribution. However, extremes in the data lead one to wonder whether maybe "this time might be different."

Rydex Asset Data: A Market Under Distribution

The first chart below shows the Rydex Bull/Bear ratio in the lower panel; the Nasdaq 100 Trust (QQQQ - commentary - Cramer's Take) is in the price chart. The ratio compares all the assets in the bullish-oriented Rydex funds to the assets in the bearish funds.

Several points are to be made from this chart. Using the Rydex Bull/Bear ratio as a tool to assess money flow, I have to believe that the bears are in control. We always want to follow the money, and with the red line below a prior low and the blue signal line, this suggests that money is leaving the market.

Another point is the distribution days (purple dots); on these days, more money is flowing into the bear funds than the bull ones. Market tops usually require many of these distribution days before prices fall on their own weight. The top in late 2005 to mid-2006 (pink rectangle) really was a giant trading range that took many months to resolve.

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The next chart shows the Rydex Buying Power, which is an indicator that assesses how much money remains on the sidelines. The indicator hit the critical 30% mark back on Dec. 4. Recent market tops also occurred at these points of low buying power, as noted with the black vertical lines.

Fast-forward five weeks, and the S&P 500 and Nasdaq are both below their Dec. 4 levels, while the Dow is just fractionally above. It is clear that the bulls were fully invested back in early December and there was little money left on the sidelines to keep the party going.

The trend of the buying-power indicator is now higher (i.e., broken yellow trend line on chart), confirming the distribution process seen from the Rydex Bull/Bear ratio data in the first chart.

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Rydex Money Market Fund: Is This Time Really Different?

The third chart is a weekly chart showing the amount of assets that are in the Rydex Money Market Fund. Rather than point to the current and very low levels of assets that are associated with market tops, I thought I would use this data to answer the question: Is this time really different?

When asking that question, what we want to know is whether the current extreme low levels in the fund will be associated with a market top, as seen over the past five years, or if we are seeing a shift in the market dynamics, such that new levels or extremes in the data are being set.

For example, the recent market bottom in July 2006 occurred with a lower level of assets (yellow oval) in the fund then in any bottom (maroon ovals) since October 2002. So in a sense, a new limit has been set, and we will have to wait for the next bottom to see if this new level continues to define them.

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In early December, the amount of assets in the Rydex Money Fund dropped to levels not seen since May 2001. (I have noted these excessively low levels with red dots.) Low asset levels mean excessive buying and suggest complacency among market participants. Of course, markets change, and what every bull and bear wants to know is this:

Will this excessive buying lead to higher prices, or will this mark a top? In other words, as I said before: "Is this time really different?"

From January 1999 to October 1999 when the assets in the Rydex Money Market Fund got to these low levels, the market typically went sideways for four weeks. Starting in October 1999, something really was different, as the market continued to power higher until March 2000, despite the very low level of assets in the fund. The "this time is really different" scenario was really the blow-off market top that ended the 20-year bull market. Since the bull market highs in the Nasdaq, every time the assets in the Rydex Money Market Fund got to this low level, significant selling ensued.

So this brings us to 2007, and assets in the fund are at their lowest level in more than five years. Is this a top? Or is this a shift or new paradigm where old extremes are rendered meaningless and prices continue to power higher?

The data -- pre- and post-2000 -- would suggest a market top at worst, or a period of consolidation. The outlier, of course, is the blow-off top.

Summary

In summary, the Rydex asset data suggest that stocks are under distribution. However, excessive buying (as seen by the low level of assets in the Rydex Money Market Fund) has led me to ask if this time is really different. For the most part, these extreme lows in the assets in the Rydex Money Market Fund have been associated with poor price performance over the ensuing month. More money will need to move to the sidelines before the market moves meaningfully higher.

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Guy Lerner is an anesthesiologist and freelance writer who trades for his own account. He blends technical and fundamental analysis to find factors that lead to sustainable moves in the markets. Lerner's approach is research-driven and focuses on supply-demand issues, investor sentiment, intermarket relationships and monetary liquidity. He is a member of the Market Technicians Association and is the founder of TheTechnicalTake.com, a Web site that offers content, commentary and strategies for investors and traders. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. He appreciates your feedback and invites you to send your comments by clicking here.