Saturday, July 14, 2007

Going Without the Flow: The Changing Dynamics of this Bull Market

In my last post, I summarized indicators that suggest that the current market is not as strong as the recent move to bull highs might suggest. The chart above, showing the Dow Jones Industrial Average (DIA; blue line) plotted against raw 5-day money flows for the 30 Dow stocks shows why this is the case.

Note that the rising action of the Dow in late 2006 and early 2007 was accompanied by breakout highs in money flow. This means that large volume tended to be transacted at the market offer rather than the bid, indicating aggressiveness among institutions in owning stocks.

During the recent move to new highs, however, money flows have been consistently weak. Indeed, every day out of the last six has seen flows below the 200 day average. Of the 30 Dow stocks, only INTC, JNJ, MSFT, and WMT display positive 10-day money flows that are above their 200 day averages. (HPQ comes close).

On the other hand, we see 10-day net dollar outflows from AIG, DIS, KO, and (interestingly) XOM.

What this means is that we're still seeing money coming into stocks, but it's a relative trickle compared to the torrent experienced earlier.

This very much fits with the recent, weak NYSE TICK data, which shows that--across the broad stock universe--traders have been hitting bids despite the rising large cap index prices. It also helps to explain why, as of Friday, we were seeing 1421 new 20-day highs, but also a surprisingly high 612 new 20-day lows.

In sum, I don't see the recent market rise as indicative of a broadening demand for stocks. Instead, strength appears selective, with money flows most positive among large cap tech stocks. Just as I doubted the sustainability of market dips over the past several months in the face of strong money flows, I question the sustainability of market rallies in the face of weak flows. While that doesn't necessarily mean a bear market is in the offing, it does raise the possibility of returning to the lengthy trading range we've experienced since May.


What's Behind the Bull Market: Money Flows

Relative Dollar Volume Flows

Ten Principles of Short-Term Trading


Kevin said...

Hi Brett,

My work to suggests that this rally is qestionable. Many of the key groups that I follow such as the banks, brokers, homebuilders, utilities and reits are not making new highs with the market. Now that doesn't mean run out and short this market, but it is worth being aware of.

Brett Steenbarger, Ph.D. said...

Hi Kevin,

Thanks for the observations. Looking through the 52-week lows, it does seem as though the themes of weak housing, rising rates, and risk aversion among financials due to spreading subprime loan concerns are dominant. This is also giving us higher VIX levels at relative market peaks.


Jim said...


Looking at money flow is a very astute way of evaluating the internal strength of the market. Thank you. Are you simply looking at the Dow 30 closing prices times their respective volume as the money flow measure? Thanks.

Nidhi said...

Hi Brett,

I have been reading your blog for a while now and each article demands my attention. (except for a few detailed psychology topics that goes above my head ..;) Thanks very much for providing this unique, seldom-ly heard point of view.

The chart here is showing declining money flow into Dow. Clearly that is not a sign of strength. From the history you have, did this pattern appear before and what was the outcome.


Brett Steenbarger, Ph.D. said...

Hi Jim,

Money flow takes every trade in every stock and looks at whether it occurs on an uptick or downtick. If on an uptick, the price of the trade times the volume is added to a cumulative total. If on a downtick, the dollar volume of the trade is subtracted from the total. At the end of the day, that cumulative total becomes the money flow for that stock, that day. I simply summed the flows from all 30 Dow stocks to create the chart in the post. Thanks for the note and for your interest--


Brett Steenbarger, Ph.D. said...

Hi Nidhi,

I am in the process of doing some historical evaluations of money flow that go back more than a few years. My work to date finds that rises on weak flows are more likely to reverse than rises on strong flows. Thanks for your note--


Bryan said...

Hi Brett,

Very interesting analysis. The thing that surprises me the most about these latest money flow figures is that the Dow had such a good week whilst the money flow was correcting back to a relatively low point for recent times. On Thursday of course the Dow had a huge day with a 2% plus rise, its biggest day since 2003. Recently , pull backs in your money flow have been accompanied by pull backs in price and certainly not new price highs.

How can we make sense of this week's money flow and price behaviour? It does not appear to fit well with orthodox economics with its emphasis on supply and demand. Do you think that sentiment or psychological approaches can provide alternative explanations? It's interesting that one of the best sentiment analysts around, Jason Geopfert, has been becoming more bullish as the money flow figures have been falling.

Thank you, Bryan Wendon

Brett Steenbarger, Ph.D. said...

Hi Bryan,

Great questions; thanks for writing. Yes, I do think that we can view money flow as analogous to the NYSE TICK: a sentiment measure capturing the propensity to execute trades at the market bid vs. offer. What my work shows (see the latest update of the Trading Psychology Weblog) is that market rises accompanied by weak money flows yield subnormal returns in the short run.