Leveraged ETF Ratio: Another Stock Market Top Sighted

The equity market has been acting sluggish this week. My previous commentary about the technical overview for the S&P 500 market included an expectation of the same. As the equity market carved out the inverse head and shoulder continuation pattern, my concern was that there was very little fuel left for it to complete the projection of the pattern upwards.

Various breadth measures including the cumulative advance decline line and the ratio of 52-week highs relative to 52-week lows were witnesses to the fatigue setting in. Obviously there are a myriad reasons we can bring to bear on this but my preference is for sentiment and technical rationale in lieu of fundamentals or news.

Speaking of such measures, an important metric that successfully warned of the February top is now flashing a similar red alert. This is the ratio of leveraged ETF assets in the Rydex family. These multiple for investors and traders the return of the S&P 500 index in both directions by a factor of two.

On Monday, the ratio of the assets in the bullish leveraged ETF relative to the bearish leverage ETF once again approached the levels that we had seen at the February top. Six trading days before the market top on February 18th 2011, the bull/bear leveraged Rydex ETF assets reached a top of 1.80 – this was in the same range that we had seen historical correspondence to market tops.

This week the ratio surpassed that slightly, going above 1.84, one day after the current top (so far). Obviously this is not an exact science for finding tops to the day. But it does provide real insight into the sentiment prevalent in the retail investors mindset. We already looked at multiple stock market sentiment data last week which suggested a similar outlook. This further clarifies that and confirms that, right now, there is too much optimism in equities for the S&P 500 head and shoulder continuation pattern to complete.

I’ll end by noting that the more traditional Rydex mutual fund asset ratios are corroborating the ETF leveraged asset ratio shown above. So there is no question where retail investors stand.