Friday, March 02, 2007
Where's The Flow (WTF)?
Some of you may be old enough to remember Clara Peller, the little old lady in the Wendy's commercial who asked, "Where's the beef?" Well, these days I'm asking the WTF question: Where's The Flow? Recall that my recent post pointed out that we can identify bottoms in markets based upon dollar volume flows coming into stocks, as institutions seize upon lower prices as bargains. In that sense, we only truly know price bottoms in retrospect, as a function of the buying that they have sparked. Until such buying occurs, there is no reason to believe that prices will turn around. Indeed, during the 2000-2003 period, we saw massive flows of funds out of technology issues that never turned around until many names lost most of their capitalization.
As you can see above, the recent market has been following the scenario from my previous post quite well. We had a runup period from December through February in which prices in the Dow Jones Industrial Average (DIA) were moving higher, but steadily decreasing funds were flowing into Dow stocks. With the market's recent swoon, we can clearly see subnormal dollar flows (Relative Dollar Volume Flow below the horizontal red line representing the 100 day average) into the Dow's component issues. On Thursday, dollar flows into the Dow were above average, with only four stocks (AA, JNJ, MSFT, and WMT) showing net outflows. Still, relative to the enhanced volume being traded, the Relative Dollar Volume Flow of 1.8 was hardly a surge of capital being put to work. We're still left asking Clara's question.
The good news is that we are not seeing, to this point, a mass exodus of capital out of the Dow large cap stocks the way we saw capital fleeing those technology names during the bear market. The bad news is that we are also not yet seeing above average Relative Dollar Volume Flows to suggest that institutions are seizing upon these prices as bargains. Until we see the latter, I am extremely hesitant to engage in bottom picking. I'm all too aware, as the saying goes, that those who live by the crystal ball are destined to dine on crushed glass. And that leads to all sorts of other WTF questions.