The Rydex family of index funds, however, is very friendly to active switchers. So market timers can invest in Nova when they're bullish and switch to Ursa when they're bearish. The relative asset levels in these funds thus provide an insight into prevailing investor sentiment that can be used as a contrarian market-timing indicator. It's important to remember, though, that the size of a fund's assets reflects not only the amount of money investors put in or pull out but also the performance of its portfolio. If the market is moving in the direction a fund targets, its NAV grows.
Strong performance attracts switchers, who pour in new assets.
The latter is the change in asset levels that can be attributed to changes in investor sentiment. Our sentiment indicator consists of Nova's assets, adjusted in this manner, divided by Ursa's adjusted assets, forming a ratio that reflects the relationship between the two funds' inflows and outflows minus the effects of changes in their NAVs. Because overwhelming investor optimism can signal an overbought market, high ratios often have bearish implications. Conversely, low ratios may signal bullish conditions, since overwhelming pessimism often occurs at or near market bottoms. Historically, ratios below 0.4 have coincided with major market bottoms, whereas those above 1.0 have accompanied market tops.