My recent discussion in the Trading Psychology Weblog and my last posting on money flows among the Dow 30 stocks found that the recent rally has differed from previous market strength. The pink line in the chart above represents what I call the Relative Dollar Volume flows for the Dow stocks. This compares the 10-day dollar flow for the 30 stocks to the average dollar flow over the prior 200 trading sessions. When the number is negative, it means that today's flow is below the 200-day average; when it's positive, it means that we have above average flows into stocks.
The chart shows clearly that the recent bull market has been built on the back of above average money flows into the large caps.
During the most recent rise, however, money flows have headed straight south. For nine consecutive trading sessions, we've had below average dollar volume flows. Indeed, we've barely had more money flowing into stocks as flowing out. And that has been during a period of record Dow highs.
Perhaps it is not coincidental that this period of very weak money flows also corresponds to a period of unusually negative NYSE TICK readings. Money flow, after all, is tracking the dollar volume in the market as a function of whether it is occurring at the market bid (selling pressure) or market offer (buying interest). This is the same way that the TICK is calculated, albeit without the volume component.
A number of commentators have suggested that these statistics have become skewed due to the recent abolition of the uptick rule, which had prevented traders from shorting stocks until they traded on an uptick. Without the uptick rule, sellers are free to hit bids just as buyers lift offers. The net effect may be to create a greater (and more accurate) representation of selling pressure, turning the distribution of such measures as TICK and money flow downward.
Still, I'm not convinced that all the weakness in these measures is mere artifact. The fact remains that, as we've moved higher, fewer stocks have been making fresh 20-day highs (my preferred measure of strength) and fewer have been closing above the volatility envelopes surrounding their short-term moving averages (my favorite measure of momentum). Divergences continue to abound among market sectors, as noted in the Weblog.
At an intraday level, as my Twitter comments indicate, I found selling programs greeting the market all day today as we approached Monday highs in the S&P futures. This has continued in spades in after hours trading as I write.
Clearly some of the indicators will need reconfiguration as a result of the change to the uptick rule. One rule that won't be repealed, however, is that rising markets that are losing strength tend to reverse and return toward their longer-term value area (the region in which the greatest amount of volume has been transacted). We saw that dynamic at work during today's trade, and we may be in the process of seeing a longer-term return to value in the extension of the day's weakness.
False Breakout or Fresh Bull Market Leg?