How do I use the Nova/Ursa ratio?

By Justin Bynum AAA
A:

The Nova/Ursa ratio is a contrary indicator designed to gauge market sentiment among retail investors. The ratio gets its name from the Rydex Nova and Rydex Ursa mutual funds. Rydex Nova is a bullish fund designed to capture returns corresponding to 150% of the S&P 500's daily movements and Rydex Ursa is a bearish fund created to capture 150% of the inverse of the S&P 500's daily fluctuations. Determining the Nova/Ursa ratio is as simple as dividing the total assets from the Nova fund by the total assets in the Ursa fund.

Because it is contrarian in nature, a very high Nova/Ursa ratio is a bearish indicator because it reflects optimism, approaching euphoria, among "dumb money". The inverse is also true. A very low Nova/Ursa ratio suggests that the little guy has thrown in the towel and that weak hands have been washed out of the market - a bullish signal.

Users of the Nova/Ursa ratio believe it is a better sentiment indicator than other measures because the ratio reflects actual-dollar commitments, as opposed to investors' opinions. However, defining "high" and "low" values can be difficult, given the short existence of the Nova/Ursa ratio. Moreover, because the ratio both leads and lags the S&P500, it is not necessarily useful in identifying turning points.

For more on this topic, read Market Breadth: Introduction.

This question was answered by Justin Bynum.

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