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 that maybe "this time might be different".

Figure 1 shows the Rydex Bull Bear ratio in the lower panel; the QQQQ is in the price chart. The Rydex Bull Bear ratio compares all the assets in the bullish oriented Rydex funds to the assets in the bearish funds.

Figure 1. Rydex Bull Bear Ratio/ daily

Several points are to be made from this chart. Using the Rydex Bull Bear ratio as a tool to assess market money flows, I would 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 below the blue signal line, this suggests that money is leaving the market.

Another point is the distribution days (or 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 on chart) really was a giant trading range that took many months to resolve.

Figure 2 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 December 4. Recent market tops also occurred at these levels of low buying power as noted with the black vertical lines on the chart.

Figure 2. Rydex Buying Power/ daily

Fast forward 5 weeks, and the S&P500 and NASDAQ are both below their December 4 levels while the Dow is just fractionally above. It is clear that the bulls were fully invested back in early December, and that there was little money left on the sides lines 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 figure 1.

Rydex Money Market Fund

Figure 3 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?

Figure 3. Rydex Money Market Fund/ weekly

When asking the question "is this time really different?" what we want to know is if the current extreme low levels in the Rydex Money Market fund will be associated with a market top as seen over the past 5 years or are we 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 on the chart) in the Rydex Money Market fund then in any market 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 market bottom to see if this new level continues to define future market bottoms.

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 on the chart. Low level of assets in the Rydex Money Market fund means excessive buying and suggests complacency amongst 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 market top? In other words, "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 side ways for 4 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 Rydex Money Market 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 Rydex Money Market fund are at their lowest level in over 5 years. Is this a market a top? Or is this a shift or a 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 market top.

Summary

In summary, the Rydex asset data suggests 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.