Thursday, October 16, 2008

A Midweek Look at Stock Market Indicators

* Dollars Continue to Flow Out of the Market - The top chart shows money flow for the 30 Dow Industrial stocks; note how the four-day moving average (pink line) plunged to lows when we made our recent market low and has stayed below the zero line after briefly spiking positive. This indicator has been the single most important factor keeping me out of stocks on an investment basis, and it continues to suggest that institutional investors and traders are transacting more volume on downticks than upticks--not something we'd expect to see if they were finding value at lower prices and accumulating stocks.

* Divergences Brewing? - As we test the recent market lows, note that the Cumulative NYSE TICK (bottom chart; blue line) is still well off its lows. I noted that we made bear market lows on Wednesday in a couple of sectors, including homebuilders ($HGX) and semiconductors (SMH) and near lows in materials stocks (XLB). Banks ($BKX), however, are well off their lows and only 646 stocks made new 20-day lows on Wednesday, much lower than the 5000+ new lows at the recent market lows. I'm watching closely to see how indicators hold up on any further test of lows and might even nibble at the long side if we see sectors holding up well. Still, that will be a trade rather than an investment as long as money flows (see above) stay negative.

* Broad Weakness - As readers know, I maintain a basket of 40 stocks that are divided evenly across 8 S&P 500 sectors. These are among the most highly weighted $SPX stocks, so they provide a good snapshot of the large cap market. As of the Wednesday close, 39 of the stocks were trading in downtrends by my Technical Strength measure (a quantified measure of trending) and only one stock (WFC) was neutral. According to Decision Point, less than 2% of NYSE issues are trading above their 20-day moving averages and only 1% of S&P 500 issues.

* Nice Historical Perspective - "There have only been two other times in the last forty years that the 200-day average has remained negative for six months - August of 1973 and February of 2002. In both cases, the market continued to trend steadily lower until the 200-day average rallied convincingly back above the zero line, signaling a real end to the selling pressure and a long-term bottom. There's little reason to think this time will be any different." - Rennie Yang, Market Tells.

* Catching Trends - This recent post was particularly relevant to trading Wednesday's market.

* Twitter Note - Several readers have asked me to include real time trading comments and observations about markets in my Twitter posts. Thus far, the Twitter feature of the blog has been used to update readers in the AM about upcoming economic reports, market indicators, and links to articles on market-moving themes. My extensive travels and work with traders make real-time market commentary difficult, but when possible I will try to include observations of particular note. Thanks as always for the interest.


ShortBus said...

I do not get that phrase. "Dollars Continue to Flow Out of the Market"

Stocks are a closed system, how can dollars flow out of a system. For someone to sell, someone much buy.

Of course there are some stocks like GLD where it open ended fund. But for most stocks, you can not get money flowing out of the markets.

I have never understood this, likewise the Chaikins Money Flow indicator. Money is not flowing In or Out, just being transferred from one person to another person.

What am I not understanding about that phrase ?

Johan Lindén said...

I totally agree with shortbus!

If I understand the markets correctly it is wrong to say money is flowing in or out the markets.

But what, for instance, TICK can tell us is what said of the market is more desperate at the moment. It can tell us if it is the sellers or the buyers market.

But if Dr. Steenbarger, as many others, likes to call it money flow it is okey with me :)

Thanks for sharing info Dr.!

SSK said...

SHORTBUS, AND JOHAN LINDEN, There is a difference. Study open interest and how it relates to price movement, there is old business and new business. If you have price rally on short covering, no new equity is entering the market, it is old business leaving the market, that is why short covering or long liquidation rallies, or sell offs are so deceiving and many time on the reversal offer no support or resistance. If you see a large rally in price, but open interest only increases a little, it is because equity is leaving the market. If you see a large rally and open interest is increasing, new business is fueling the rally, and new equity is flowing into the market. Same concept with long liquidation. The dual auction market process also has passive and initiave buying and selling that can be telling as to whether the price action is reversing. To study futher, Don Jones at is a great resource. Best, Steve (SSK)

Its said...

When you buy a stock, an exchange is accomplished, that of exchanging currency units/money market shares for stock certificates. No money literally flows in or out of the market, but for the sake of American Boobuses, it is cognitively easier to say that "dollars continue to flow out of the market" when prices are dropping from a lack of exchanges.

Johan Lindén said...

ssk, the stock market doesn't work as the derivativa markets where new issues can be opened at any time.

There's only two way money can flow out or in to the stock market. The first one is to issue new stocks or redeem old ones. And that's is not what we are talking about in this article.

The other way is the depreciation or appreciation of a stocks value. Which in English is called that a stock "goes up" or that it "goes down". And that too has nothing to do with this article about money flows.

Regarding "its" comment, Dr Steenbarger is not talking about the depreciation of the stocks value when he writes money flows in this article or others. He's talking about the TICK.

Maybe it's cognitively easier for the American Boobuses, but it makes people who know what the market is about confused.

ShortBus said...

Oh dear, Maybe Dr Steenbarger should check his comments section and come and explain to us what he was talking about.

Brett Steenbarger, Ph.D. said...


Thanks much for the comments re: the money flow indicator and sources of possible confusion. I apologize that, in the 15+ hour days I find myself putting in, that I have been delinquent in addressing comments.

In a nutshell, it *does* make sense to think of money flow in terms of sentiment (rather than actual dollars flowing in and out of markets), because money flow is really a TICK measure weighted by price and volume. It's that weighting that makes it an approximation of "flow", such as that calculated by Trim Tabs. But I do think my casting of the indicator leaves too much room for confusion: money flow assesses the tendency of large traders to transact at the bid vs offer and thus is one way of capturing buying or selling sentiment.