Crunch Time for COMP
By Ron Taylor
5/2/2003 2:44 PM ET
I was scanning through our internal market timing indicators today and the Rydex OTC/Arktos ratio caught my eye. Basically, Rydex (800-717-7776) is a mutual fund company that has, among others, two funds that target opposite moves in the Nasdaq 100 Index (NDX – 1133.88). The Rydex OTC fund (RYOCX) is positioned to duplicate performance of the NDX. In other words, it will increase in value by one percentage point for every percentage point advance in the market. By contrast, the Rydex Arktos fund (RYAIX) targets a downward move in the NDX. It tends to go up in value when the stock market declines. Since these two funds are quite clear about their respective bullishness or bearishness, the amount of money flowing into or out of these funds gives us an indication of investor sentiment. For this, we compare the assets in one fund to the other in ratio form (OTC assets divided by Arktos assets).
We can make a general statement that a high reading in the OTC/Arktos ratio is an indication of investor optimism because more assets have moved into the bullishly poised OTC fund relative to the bearishly poised Arktos fund. Also, low readings represent investor pessimism because the Arktos fund is the subject of more asset allocation. Because optimism can be dangerous for stocks, high readings in the ratio should be viewed as potentially bearish for stocks. On the other side of the coin, low readings tend to be bullish.
As I was scanning this chart, I noticed that recent readings have come in at 26.62, and this indicator got as high as 28.17 on April 24. Doing a quick eyeball scan of the chart, it looks like the highest readings since March 2002.
I went into the actual spreadsheet to get my hands dirty in the data. It turns out there have only been two instances where readings came in above 28.17. These were 29.25 on March 13 2002 and 31.62 on November 6 2002. On the following chart of the Nasdaq Composite (COMP – 1499.6), I have indicated these two extreme instances with red arrows. As you can see, one was a very good signal and marked the beginning of a severe downtrend. The other signal, from November 6, was not quite as good, as the Nasdaq proceeded to rally another five percent before moving sideways to lower. Also notable is that both of these signals coincided with overbought readings on a Welles Wilder's relative strength index, and that we are currently approaching similar overbought levels.
Another interesting aspect of the equation is that we are also approaching the highs established in late November of 2002. In fact, as I type this we are currently trading above the COMP's closing levels from November (1487.90). Technicians will be keying on whether or not the Nasdaq is able to close above these levels over the next few trading sessions. A close above could signal the potential for a continuation of the current rally. However, given the optimistic readings from the OTC/Arktos indicators and the current overbought levels on the RSI, some caution is warranted. I'll be keeping an eye on this indicator and will update our readers of future developments.
- Ron Taylor
"The point at which a competitor is pursuing the best possible strategy, given the strategies of the other participants" - John F. Nash
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