April 27, 2007, Newsletter Issue #64: Mutual Fund Flows

Tip of the Week

A sentiment indicator that we monitor each day is provided by the Nova and Ursa funds from the Rydex Series Trust. The Nova fund is designed to have a target beta of 1.5. In other words, using shares of equities, stock index futures contracts, and options on those securities and futures, the fund has a target performance benchmark equal to 150 percent of the S&P 500 Index (SPX). Traders who invest in this fund are considered bullish on stocks. The Ursa fund is designed to provide a performance inverse to that of the SPX by using a combination of short selling and options on stock index futures. Investors in this fund are considered bearish on stocks.

We can get an accurate view of the sentiment picture by comparing the amount of assets in each fund. Specifically, we divide the total assets in the Nova fund by the total assets in the Ursa fund to arrive at a Nova/Ursa ratio. A high Nova/Ursa ratio indicates an extreme amount of optimism (everyone investing in Nova) and a low Nova/Ursa ratio indicates an extreme amount of pessimism (everyone flocking to Ursa).

In response to the huge rise in popularity of the technology sector in late 1998 and 1999, Schaeffer´s Investment Research added the Rydex OTC/Arktos ratio to its arsenal of sentiment indicators. The OTC is a bullish fund that follows the Nasdaq 100 Index (NDX). In contrast, the Arktos fund is allocated so that it provides a return opposite that of the NDX. Similar to the Nova/Ursa ratio, a high reading on the OTC/Arktos ratio means that investors are optimistic toward the market and a low reading shows that investors are pessimistic toward the market´s future.

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