Rydex Nova/Ursa Ratio

A good sentiment indicator is the Rydex Nova/Ursa ratio because it is backed by hard cash and not just polls. It reflects the sentiment of the small guys who put their money into funds. Speculators who invest in the Rydex Nova fund are considered bullish on stocks because the fund has a target performance benchmark equal to 150% of the S&P 500 index (SPX). The Ursa (bear) fund is designed to provide a performance inverse to that of the SPX (also 150%) by using a combination of short selling and options on stock index futures. Investors in this fund are considered bearish on stocks. Specifically, we divide the total assets in the Nova fund by the total assets in the Ursa fund according to a proprietary formula to arrive at a Nova/Ursa ratio. A high Nova/Ursa ratio indicates an extreme amount of optimism (everyone investing in Nova) and is considered bearish by contrarians. A low Nova/Ursa ratio indicates an extreme amount of pessimism (everyone flocking to Ursa). This is a contrary indicator and a buy signal.