Almost 14 years…
The Rydex family of mutual funds contains a bullish S&P 500 fund (the Nova Fund) and a bearish S&P 500 fund (the Ursa Fund). Yahoo Finance reports the Nova Fund now holds more than double the assets of the Ursa fund. That means that more than double the amount of investment funds are committed to a bullish stance versus a bearish one. It’s an extreme high in bullish sentiment not seen since February 2001.
The Rydex bull/bear ratio often hit 2:1 around the year 2000. That was a major market top. The ensuing years saw several significant market sell-offs… including the financial crisis’ 800-point plunge. From 2005 to 2014, the most bullish the ratio became was around 0.5:1. But as you can see from the chart below, the ratio went north of 1:1 at the beginning of the year… and has now spiked up above 2:1.
This massive surge in bullish sentiment should cause any investor to take notice.
My friend and former Stansberry & Associates colleague, Editor-in-Chief Brian Hunt, gave the best explanation of why it’s important to pay attention to extremes in sentiment…
He said to picture the Dallas Cowboys. Now picture them all on a small fishing boat. Everything’s fine as long as they’re dispersed along the rails. But if they ever feel like the fish are biting better on one side than the other… look out. Overcrowding to that side flips the entire boat. Everyone gets soaked.
That’s why—long before you ever see the Cowboys crowding to one side—you want to make sure your life jacket is snug and secure. You may get wet in an emergency situation… but your safety precautions will ensure you survive to fish another day.
Regular Daily readers know our “financial life jacket” is the Palm Beach Three-Legged Stool of Safety: appropriate position sizing, trailing stop losses, and diversified asset allocation. These risk-management tools allow us to ride bull markets for oversized gains… while insulating us from ever sustaining a catastrophic loss of capital.
If you haven’t donned your “financial life jacket” yet, do so right now. And look for our critical asset allocation update in January.