This Stock Market Ratio Goes “Crazy” at 62X (Another is Even “Crazier”)

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Time-tested technical indicators are highly useful to investors.

Yet, a stock market investor can arrive at an even higher confidence forecast by combining technical analysis with the message of sentiment measures.

Likewise, it’s good to combine near-term analysis with a bigger picture perspective.

With that in mind, let’s look at the past 20 years of a couple of related sentiment measures.

This chart and commentary are from the December Elliott Wave Theorist:

The middle graph is the ratio between the amount of money that Rydex investors have put into bullish funds versus bearish funds. Look toward the left, and you’ll see the words “normal range.”

In the old days, that is, 15 years ago, the ratio was around 1:1 or 2:1. It was a fairly even split. People are generally more optimistic than pessimistic, so in general there was a bit more money in bull funds than in bear.

Investors have been going crazy in the last five years. On November 19, the ratio reached 62:1. That’s right: There is 62 times as much money in the bullish stock funds at Rydex than in the bearish stock funds.

Believe it or not, that’s not even the craziest indicator on this chart. Look at the bottom graph, which depicts the ratio of leveraged bullish funds versus leveraged bearish funds. It shows that there is 82 times as much money in the leveraged bullish funds as there is in the leveraged bearish funds.

That is incredible. It dwarfs anything in the past.

Relatedly, a Dec. 3 Barron’s headline said:

‘Margin Debt’ Is Rising. It’s Becoming a Risk for Stocks.

On Dec. 20, another Barron’s headline said:

The Good News as Stocks Plunge? Cash Is Pouring Into Equity Funds.

Does this extreme in bullish sentiment foretell a major stock market reversal?

The Elliott wave model and an array of technical indicators offer big clues.

Get the insights that will help you to navigate 2022 by following the link below.