Friday, March 21, 2008

What Money Flows Are Telling Us About The Current Stock Market

The chart above tracks a five-day moving average of money flow across the Dow 30 Industrial stocks. Money flow is a measure of the dollar volume of trades on upticks minus the dollar volume of trades on downticks. The result shows the amount of funds flowing in and out of the market. Please note that these are raw money flow figures, not ones adjusted with respect to market volume or compared with a moving average period.

The money flow aggregated across the 30 Dow stocks correlates highly with price change for the Dow average as a whole--about .44 over the time period covered by the chart--but it is an imperfect relationship. It's when we see money flowing out of the market even during periods of price strength--and money flowing into the market during times of price weakness--that the data are most helpful. When the market peaked late in February, for example, dollar flow readings for the Dow stocks were consistently negative.

Our chart tells us two important things:

1) Money has been coming out of the market, as measured by the Dow. A cumulative line of the money flow data has a steady, negative slope.

2) Five-day peaks in money flow have tended to correspond with intermediate-term tops in the Dow during this declining period of stock prices.

Most recently, the Dow has bounced off its lows and five-day money flows have just turned positive. There is nothing yet in the readings to suggest that large amounts of funds are flowing into stocks. Rather, recent money flows into Dow stocks have been subdued, and that has me questioning the longevity and sustainability of the recent bounce.


My Previous Post on Money Flow

Money Flow and Dow Returns