Reading the Bulls

There are a lot of different measures out there purporting to tell which direction the market is headed, but one intriguing, real-world one is something called the Rydex Asset Ratio. The Rydex ratio is a pretty simple formula: It looks at all the funds in the Rydex family and figures the following:

(Money Market + Bear Fund Assets)

(Bull Fund Assets + Sector Fund Assets)

The less optimistic people are, the higher the numerator gets, and vice-versa: a very simple and elegant formula, and based totally in what actual investors are doing right now. Right now, the ratio is the lowest it's been in several years, with far more invested in bullish and sector funds than money market or bearish funds.

But this is a contrarian indicator, and research has found that when investors are at their bullish, the market is due for a fall. The last time the Rydex ratio was more bullish than this, it was in 2000, and the dot-com market was about to collapse. Food for thought.