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Figure 1.

Rydex Bullish and Leveraged to Bearish and Leveraged/ daily

1) The ratio of Bullish and Leveraged to Bearish and Leveraged: 0.77

2) Values <=1 (below blue line) means more bears than bulls and typically this is bullish for
prices

3) Values >=2 (above red line) means more bulls than bears and typically, this is bearish for
prices
Figure 2. Rydex Money Market Fund/ daily

1) High indicator value suggests fear as investors are seeking the safety of the money
market fund; this is bullish for higher prices

2) Low indicator value suggests complacency as investors are fully invested; this is bearish
for higher prices

3) The trading bands are set to identify values that are 2 standard deviations above normal
over the past 40 trading days
Figure 3. Rydex Relative and Absolute Combination Indicator/ daily

1) When the indicator is green bullish for higher prices

2) When the indicator is red bearish for higher prices

3) The indicator uses the total amount of assets in all bullish funds and the total amount of
assets in all bearish funds; the indicator looks for both relative and absolute extremes in
the data
Figure 4. Rydex Combo Indicator/ daily

1) Figure 4 is a composite indicator constructed from figures 1 -3.


Figure 5. $VIX/ daily
Figure 6. Rydex Total Bull v. Total Bear/ weekly

1) The indicator uses the total amount of assets in all bullish funds and the total amount of
assets in all bearish funds

2) The indicator attempts to identify multi week swings

3) When the indicator is green, Rydex investors are bearish and there are more assets in
bearish oriented funds than bullish oriented funds; in general, this is bullish for higher
prices

4) When the indicator crosses above the signal line, prices tend to move higher

5) Indicator values >=58% lead to intermediate term tops


Figure 7. Rydex Buying Power/ weekly

1) This indicator is constructed from all the assets in the Rydex Money Market Fund and
from the total amount of assets in all bullish funds plus the total amount of assets in the
bearish. Essentially, this is a combination of our two buying power indicators: my old
version and the TradeKing version.

2) The purpose of the indicator is to assess the amount of money or buying power on the
sidelines

3) High buying power bullish signal

4) Low buying power bearish signal


My Comments

1) Figure 1: The ratio of leveraged bulls to leveraged bears is 0.77

2) With price greater than the 200 day moving average on the QQQQ, this becomes a
BUY SIGNAL

3) See the Rydex Special Report for 5.24.10 for further details on this strategy

4) It should be noted that the last 3 trades from this strategy were losers

5) Thats 3 losses in a row! Prior to this period there has never been two losses in a
row from this strategy (in over 40 trades in 7 years)

6) So I know what you are thinking: is this strategy due for a winner or is this one of
those times where a strategy goes south (i.e., no longer works) just when you start
to get involved?

7) I dont have the answer for you; for me, personally, I still believe in the value of this
strategy

8) However, I may reduce my exposure ---that is, not take as big of a position

9) Look at the Maximum Adverse Excursion (MAE) graph from this strategy
10) This graph shows every trade from the strategy; winning trades are in green and
losers are in red

11) MAE refers to how much an individual trade has to lose before it is closed out for a
loser or a winner ---MAE is how much you have to angst while the trade goes
against you

12) MAE is measured in percentage points down the x-axis

13) Looking at all the trades from this strategy we note that every trade but 1 had an
MAE of less than 4% (i.e., to the left of the blue line); the majority had an MAE less
than 2%

14) Certainly a 4% stop loss is out of the noise of the market

15) So lets say I have a $100,000 account and I want to risk only 2% of my capital or
$2000 on this single trade

16) Therefore, I can use $50,000 of my capital since a 4% stop loss (if triggered)
represents a $2000 loss

17) This is how I use the MAE graph to set stops and determine when a trade is a bust

18) If you dont want to risk 2% of your capital, then risk 1%

INDICATORS

19) Figure 4: the composite indicator is Neutral / BULLISH

20) Figure 3: remains bullish

21) Figure 3: first gave a bullish signal on May 25, 2010

22) In the Rydex Special Report 5.26.10, I discussed the indicator in Figure 3 and the
implications of the buy signal

23) Figure 2: money in the Rydex Money Market fund has yet to exceed the highs seen
at the February lows

24) This is a point I keep hammering home maybe we just need to see even lower
prices before a bottom is put in

25) Figure 6: bullish

26) The only fly in the ointment: figure 2 and figure 7 both indicate that not much
money moved to the sidelines during the sell off; maybe we need another whoosh
down?