Rydex ratio in position

One of my trustiest indicators the Rydex ratio is giving the green light here. It is now showing solid pessimism which well exceeds the pessimism seen at prior correction lows which like I said earlier, is what I want to see. The Rydex ratio has been very solid as a ST/IT timing tool. Currently standing at 1.14 it's quite bullish for the market going forward. Now of course it could rise even more getting more extreme if the market sinks lower but that would set up for an even stronger buy signal. At 1.14 the Rydex ratio strongly suggests downside in the market is limited from here and/or big upside is imminent. Even if we ultimately crash like the bears think, we should get a strong rebound first. Look for instance what happened at mid August 2007. The Rydex ratio was at the same level as it is right now and the market made a bottom and had a very nice rebound even though ultimately we crashed in 2008.


Was today the start of the rebound? I'm not so sure about that. Notice how we conveniently "double bottomed" yesterday at "support". I'm always very suspicious when the market bounces off or sells off at well know support or resistance levels when making a powerful move. You tend to see such moves last for a few days or even 1-2 weeks but they end up failing because the trade was too crowded. I still get this feeling that too many weak handed technical types are trying to pick bottoms which isn’t a good thing because these guys will all dump en masse once the market goes against them. Look at Cramer. 2 days ago he was saying sell into strength and now when the market goes up for 1 day he says "negativity is overdone". That's the sort of "fear of missing the bottom" attitude that prevents the market from making a true low.

In today's National Post I read an article titled "Markets test key support" and the strategist in the article was quoted by saying “1050-1040 is crucial for the market" "this is really the last line in the sand. If you don't hold it here the rally from Marck 2009 is over." I've been arguing that the break of such well known support levels is what the market really needs to flush out the weak longs like this guy and embolden the bears to press the short side which would then very likely set up for at least an IT low if not a LT low. Given that we've held support so conveniently, it makes me leery of a bottom just yet although I suspect the bottom is probably not too far below 1040. Maybe I'm wrong about this and I'm being too picky about the things I'd like to see. It certainly wouldn't be the first time.

Bottom line: A bounce here certainly won't be surprising but that's the problem with it....it's not surprising making it susceptible to failure shortly afterwards especially when there's no solid positive catalyst behind it. A better set up for a bottom would be a break below 1040 accompanied by a VIX spike to 40+ but as I always say, the market doesn't always give you what you want.

I remain patient.