We last mentioned Walter Deemer’s views on the cyclical bull, secular bear market back in 2004. He was profiled again last week in Barron’s.
Here’s an excerpt:
You’ve been pointing to the Nasdaq as the most vulnerable area of the market for a long time. Are you surprised it has held up?
I’m surprised because in a normal four-year cycle — and I keep going back to the four-year cycle, because it has worked since the end of World War II, and when something works as long as that, you have got to believe in it — the market goes up for a little more than two years and then goes sideways as it forms a top.
But the point of demarcation in the average comes usually somewhere late in the second or early in the third year, which would have been somewhere in late 2004 or early 2005. Yet the market has just hung in there and hung in there and hung in there. That doesn’t mean you can’t have a full-fledged four-year cycle decline, because some of them only take three or four months to complete, and that doesn’t mean the Nasdaq is still not vulnerable.
What’s activity in the Rydex funds pointing to?
At the peak a couple of weeks ago, 37% of Rydex’s sector-fund money was in their energy funds, which is a huge, huge number, especially since they only have two energy funds. I’m convinced the Rydex Fund players are doing the same sort of thing that hedge funds are doing. I think a lot of the smaller hedge funds are using the Rydex funds to move in and out of the market, in and out of sectors, and in and out of bearish funds. I’m seeing general complacency.
I should cite another study, too, which is the ISI Group’s hedge-fund survey. A couple of weeks ago, their gross exposure hit an all-time high, which means hedge funds were more exposed to the market than they have ever been before — which possibly can be explained by the lower volatility: It takes more dollars to achieve the same result. But, at the same time, the net exposure was just about at an all-time high. It is a contrary indicator.
The hedge funds are the driving force in the market these days, and they are still most bullish at tops and most bearish at bottoms. The Rydex numbers confirm there is a lot of bullishness, or to put it another way, there is not much active bearishness. People maybe talking bearish, but they don’t seem to be acting bearish." (emphasis added).
Loaded for Bear
Interview With Walter Deemer, Publisher and Principal of Technical Analysis, DTR
Barron’s, Monday, February 20, 2006