Sunday, February 01, 2009

Stock Market Sentiment: A Look at Muted Money Flows

Recall that money flow takes the dollar volume of each stock transaction (price times volume) and adds that to a cumulative total if the trade occurs on an uptick; subtracts it from the total if the trade is on a downtick. Because this is a dollar volume-weighted Cumulative TICK, it is designed to capture the buying and selling influence of large trades and, therefore, large traders.

When we add the money flow from all the stocks in an index or sector, we can assess the buying and selling sentiment for the broader market. The top chart shows that the money flow for the Dow Industrial stocks is off its early January high, but also well off its bear market lows. While the market has not been able to sustain the buying interest to sustain a bull market move, neither have we seen intense selling pressure.

An interesting perspective from the bottom chart is the four-day moving average of the Dow money flow, which is neutral as of Friday's close. Note how the four-day average oscillates around the red, zero line. Those oscillations have lost amplitude as the market has been range bound and as VIX has been cut almost in half from its bear market peak. That tells us that we're seeing less intense sentiment on both the buying and selling sides, which of course has been helping to sustain the range market. I will be looking for any pick up in the magnitude of the money flow numbers as one clue as to eventual breakout from the market range.