Sentiment Not Bullish Enough for Top
by Carl Swenlin

The Rydex Cash Flow Ratio is calculated by dividing the cash flow for bear plus money market funds by cash flow into bull funds. As the Ratio index moves between its trading range extremes, we can gage the amount of bullish or bearish sentiment in the stock market. See the chart below. In June the Ratio hit a level that signalled that an important price low had been hit, and, even though the S&P 500 has rallied about 14% since then, the Ratio only traveled about half the distance to the overbought side of its range (red line), indicating that investors still have not fully accepted the reality of the rally.

At first it was the bears that had refused to give up, but the following chart shows that, while the bears have since retreated, the rally has failed to recruit a sufficient number of bulls to drive the Ratio to bullish extremes.

The following table shows the results of our primary timing model as it is applied to a broad range of market indexes and sectors, and those results are unanimously and robustly bullish. Until those signals start switching to neutral (it is much too soon to get sell signals), I will not be concerned about the viability of the rising trend.

This table is updated for subscribers every trading day in the Decision Point Alert Daily Report.

Bottom Line: The market is overbought as measured by many of our internal indicators, and it should experience a small correction or consolidation, but the Rydex Cash Flow Ratio has not reached a level where we should be concerned about a major top.

Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics if conditions change.

BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.