Stockfest: Money Flow Breakout in VZ

A while back I indicated that I'd be holding a stockfest, examining individual equities with interesting money flow patterns. Since then, we've looked at Toshiba, the semiconductor sector, Amazon, and the Dow 30 Industrials. I'll be covering some of the suggested stocks from readers in upcoming posts.

To kick off the stockfest, here's one mentioned yesterday by a reader. As the chart above shows, Verizon (VZ; blue line) broke out of a range on elevated volume. Just as important, money flow (pink line) jumped on the rise, indicating that much of this volume can be attributed to buyers lifting offers.

We saw similar buyer aggressiveness in late 2006, leading to higher prices into early 2007. Note that, since that time, money flow has been consistently positive for VZ. Clearly, large market participants have been displaying interest in the stock.

One interesting tell leading up to the breakout: When I compute relative dollar volume flow by expressing money flow as a proportion of total volume, several spikes in relative flow on rising stock prices can be seen to precede the recent market move, most notably on 3/30 and 4/16. I continue to find that screening for jumps in money flow can help target stocks that are candidates for breakout moves.

Here Are Friday's Blog Links, Pivot Levels, and Market Views

Sunday Morning Webinar: Submit Your Questions!

I recently mentioned that I will be doing a free, interactive two-hour Webinar on the topic of improving trading performance this Sunday morning at 7 AM CT. Here is the registration page; I'm pleased to see that we have over 170 participants signed up so far.

But here's your opportunity to help shape the Webinar: If you have specific questions about trading psychology, trading performance methods, or trading techniques, please submit them as comments to this blog post. I will do my best to address these during my presentation and/or during the interactive discussion following.

Once again, I want to thank Steven Buss for organizing this session. He's an active participant in the NeoTicker and TradeStation forums, and I greatly appreciate his dedication to trader development.

It'll be early, so bring your coffee! I look forward to seeing you on Sunday--

Brett

Intraday Patterns in the Money Flow Data

In my recent post, I illustrated a short-term trending pattern in the intraday money flow data. In Wednesday's market, I tapped Home Depot (HD; blue line) for this same pattern, as it opened higher in a mixed market (thanks to favorable housing news) and then proceeded to rise on strong money flow (red line).

Around 10:30 AM ET, however, it was clear something was wrong. A few large trades lifting offers in HD had taken money flow to daily highs, but price was no longer participating. Readers will observe that this is the same inefficiency pattern that we see in the NYSE TICK data at market tops in the indexes.

From there, price moved steadily lower in HD, even as the broad market registered fresh highs. Interestingly, money flow bottomed out around 11:15 AM, well ahead of price. That is also a bottoming pattern we frequently see in the NYSE TICK, as selling pressure dries up on new price lows.

It makes sense that patterns in the money flow might mirror patterns in the NYSE TICK, as money flow is really a volume-weighted TICK measure for each individual stock. (More on how money flow is calculated can be found here).

I strongly suspect that this can be a powerful tool in the arsenal of the intraday trader of individual stocks. (Note: data from RealTick, charted in Excel).

Here Are Thursday's Blog Links, Pivot Levels, and Market Views

Trading and the Adrenaline Rush

In today's Trading Psychology Weblog, I linked to a blog post on the topic of the "flight or fight" adrenaline response and its effect on trading. Dr. Bruce Hong, a blog reader and active trader, kindly responded to the link and offered his own, medical perspective:

I don't wish to sound critical, but your analysis is a little bit incorrect. Allow me to introduce myself. I am a physician (ER) with a great deal of experience with adrenaline and adrenaline-producing situations.

First, let's look at the biological role of adrenaline: Let's say you're walking down a path and a tiger jumps out at you. Instantly, you perceive a threat and adrenaline is released. This is a response that is AUTOMATIC and not under conscious control. The immediate response is, as you note, to prepare your body for "fight or flight". But, beyond increasing your heart rate, blood pressure, and blood flow to your muscles, IT ALSO DOES SOMETHING IN YOUR BRAIN! Namely, it shifts blood flow AWAY from the frontal lobes and to the motor cortex. After all, you don't need to do any long-term planning at this point. Either you survive - or you don't.

This response is very beneficial in acute, MILD stress. In biological terms, 'mild' means you are not having your limbs torn off or exsanguinating. Acute means lasting <5 minutes. These are biological definitions and, unless re-stimulated, that is roughly how long the "adrenaline rush" lasts.

The important thing is that we are no longer at risk for tiger attacks, but our automatic response to threat is still the same as if a tiger had just jumped out at us. And if we are in a trade, this same sequence of events still occurs. Remember, it's automatic. Now, every one is aware of the obvious physiologic responses that WE CAN FEEL. You report that this is uncomfortable - it's not. It’s just biology. It's only uncomfortable because you are sitting, trying to remain calm, AND TRYING TO MAKE GOOD DECISIONS. If you were a pro athlete, you would want this to occur during a critical point in the game, and to make quick, ‘instinctive’ moves – hence the term 'adrenaline rush'.

BUT WHAT YOU CAN'T FEEL IS THE REDISTRIBUTION OF BLOOD FLOW IN YOUR BRAIN.

And this is what destroys us as traders. Remember, blood is flowing TO the motor cortex and AWAY from the Frontal lobes (the governor or long-term assessment and planning part of the brain.) Normally, it functions as a damping mechanism to reduce or counteract the effects of emotion on our decision-making processes. It is the part of the brain that allows us to assess the long-term consequences of our actions. But because of the presence of adrenaline, we have an overwhelming URGE TO DO SOMETHING - NOW! And all our thought processes are directed to threat and elimination/avoidance of that threat. So instead of thinking things through carefully, we make abrupt, impulsive decisions.

Now, here's the take home message. There are a number of things that you can do behaviorally, but not cognitively. (Remember, the thinking brain is shut off for ~5 minutes). So, you can force yourself to wait 5 minutes, do jumping jacks to 'burn off the adrenalin', and, most importantly, use visualization BEFORE you enter the trade. You would visualize yourself entering the trade and rehearse every situation and prepare your responses to each possible event. In that way, you don't perceive a threat, but a contingent event - so you don't develop a threat response. And, if something totally unexpected happens, you would have prepared a plan, like "exit immediately" or do a quick scan of the news wires, or exit and then do a scan, etc.

BIO: Dr. Hong was trained in Internal Medicine and started his career in Geriatrics and Chronic Pain/Addiction treatment, where he learned quite a bit about the role of adrenaline in behavior. He recommends the work of Dr. Robert Sapolsky, who has worked in the area of stress, as particularly useful. Now in his 60's, Dr. Hong is transitioning toward retirement and life as a trader. He credits Woodie's CCI Club with helping him think for himself as a trader. Dr. Hong can be reached for questions at bhong 4664 at yahoo dot com (no spaces).


RELATED POSTS:

Techniques for handling performance anxiety in trading

The Most Important Psychological Skill for Traders - Part One, Part Two

Daytrading Stocks With Money Flow Patterns

Recall that the relative money flow indicator is designed to track the buying and selling preferences of large market participants. Each trade in a stock is tracked by multiplying the volume of the trade times the trade price. That gives you dollar volume. If that trade occurred on an uptick, the dollar volume is added to a cumulative total. If the trade occurred on a downtick, the dollar volume is subtracted from the total. The running total, called money flow, is very sensitive to large trades occurring at the market offer price (aggressive buyers) and at the market bid (aggressive sellers).

In my relative money flow calculations, I simply express money flow as a proportion of total volume. Thus, if volume expands from period one to period two but money flow remains the same, we can see that the market is losing efficiency: it's taking more volume to create the same inflows.

Until now, all my money flow research has used end-of-day data. Here we see a chart of Citigroup stock (C) for 4/30/07, with 15-minute bars. Above the opening bars, we can see the relative dollar volume flows specific to those 15-minute periods. Let's walk through the early morning trade:

The Dow opened lower that morning, but C opened higher on positive money flow. In fact, 15 of the 30 Dow stocks traded with outright negative money flows during the first 15 minutes of the session. That C opened higher with positive flow was our first sign of relative strength.

Note what happened in the second 15-minute period. Not only did C jump higher in price; the relative flow for that period was a whopping 12.74. (As a point of reference, consider that the median relative flow for C from 2004 to the present has been 3.46). This means that large trades were very aggressive on the buy side, even though the market overall was not strong.

In the third 15-minute period of the session, volume in C jumped meaningfully, but relative flows rose even more to an eye-popping 20.06. That means that institutions are jumping into the stock (rising volume), and their participation is strongly bullish. They are willing to lift the offer price in order to get into the stock.

Notice how this bullish momentum then carried us higher over the next hour on solid dollar volume flow readings. The active trader, noting the relative strength in the stock and the very strong money flows, had plenty of opportunity to participate to the upside.

(Note: Relative flows began to wane after this period and actually turned negative during the afternoon, with the final daily reading coming in at 2.83. In a future post, I will examine reversal patterns in the money flow data).

When a stock opens higher in a down market on solid volume and with positive money flows, that should trigger an alert for the short-term trader. Large market participants are so interested in owning this stock that they're bucking the overall market. Once we then see *rising* relative flows and rising volume in the stock, we know that there is significant demand for the issue. That is the kind of scenario that lends itself to short-term trending moves.

It's a promising example of how traders can track the behavior of the market's largest participants by focusing on the opening minutes and finding a potential directional edge. More from this research to come.

Here Are Wednesday's Blog Links, Pivot Levels, and Market Views

Every Trader Is A Trading System

I interviewed system developer Michael Bryant to prepare for this post. Mike offers a free newsletter for traders that includes valuable information for those interested in trading and/or developing systems. He also offers worthwhile free downloads.

The purpose of my interview, however, was to discuss with him the latest version of his Market System Analyzer (MSA). This strikes me as a tool that could be valuable for discretionary and system traders alike.

The idea behind MSA is that you treat all trading like system trading. In that sense, every trader is a system, although they may not be systematic. Mike's way of putting it was more blunt: There *are* no discretionary traders.

By entering your trades into a program such as MSA, you can learn a great deal about your strengths and weaknesses. The program enables you to identify the position sizing that would work best for your trading, with a goal of optimizing risk and reward. The software also enables traders to identify runs of winners and losers (dependencies) and calculates detailed performance statistics on your trading. (Note: I have no commercial affiliation with the product or with Mike; nor did he solicit this mention).

My sense is that this could form a useful part of a trader portfolio that includes a journal and video playbacks of markets for review. The idea is to turn your trading into a platform for learning and development. By viewing yourself as a system and knowing how that system behaves, you're in a stronger position to optimize yourself.

Suppose, however, that you trade multiple markets. The latest version of the software (version 3) not only monitors and evaluates systems and trades, but also portfolios of systems. This would be particularly useful for discretionary traders who trade multiple instruments. You could separately evaluate your trading of each instrument and then see how each contributes to the whole of your performance.

The take-away message? You don't have to be a systems trader to be systematic about your trading.

Related Readings:

Three Steps Toward Becoming a Better Trader

Five Defining Features of Market Pros

Coaching the Professional Trader: A Consumer's Guide

Coaching has become an institution within American business. According to a recent Harvard Management Update, 86% of companies utilize coaching to enhance the skills of their managers. Indeed, a Harvard Business Review study estimates that 1 billion dollars is spent annually on executive coaching. The article refers to the market for executive coaches as a kind of "wild west", in which "No one has yet demonstrated conclusively what qualifies an executive coach or what makes one approach to executive coaching better than another. Barriers to entry are nonexistent--many executive coaches know little about business, and some know little about coaching." Despite valiant efforts to standardize the field, such as The Executive Coaching Handbook, the plain reality is that coaching in the corporate world is a field without a firm empirical base and without uniformly recognized credentials.

This wild west applies not only to executive coaching, but the gamut of coaching in the trading world. There is a very thin literature dealing with the coaching of traders, and much of that is more applicable to the novice, retail trader than to the established professional. Much of the popular literature, for example, assumes that major goals of coaching are to help traders establish trading plans and stick to these with discipline. This simplistic notion of trading does not begin to capture the complex world of a market maker at an investment bank, who is interacting with trader colleagues, market, and sales professionals through the day. Nor does it ring true to the multimillion dollar portfolio manager at a hedge fund, who might be trading a long/short strategy based upon quantitative valuation models.

While coaching of the retail trader has tended to address the needs and interests of struggling traders, trading coaches are most often sought for professional traders who are already successful. (Many firms, in fact, only hire traders with established track records of success who already have demonstrated successful trading methods and risk management). Very often, the traders seeking coaching are looking to "take it to the next level" by expanding the size and/or scope of their operations. Others are finding that their success increasingly places them in managerial roles, for which they were not trained and which may not represent their true passion. Still others face life challenges apart from trading that might impact their performance.

If you're a professional trader or trading firm considering hiring a trading coach, what should you look for? Here's a brief checklist that might guide your initial search:

* Trader Motivation - My experience across proprietary firms, hedge funds, and investment banks is that the value of coaching is directly proportional to the trader's interest in the process. When the coaching is initiated by management (or HR) with little trader input, it rarely turns into an ongoing, useful process.

* Rapport - A large body of research in psychology suggests that change efforts are most likely to be successful when there is a positive working relationship between the parties involved. Scheduling initial, trial meetings to determine whether or not there is a solid alliance can help avoid wasting much time and energy. If rapport isn't present after a couple of meetings, it most likely won't be there.

* Content Awareness - A trading coach should know something about trading and about the kind of trading engaged in at the relevant setting. The challenges facing a high frequency trader at a prop firm and a portfolio manager at a growing hedge fund are meaningfully different. It is difficult to build a strong rapport if the coach is clueless about the trader's life work.

* A Thorough Assessment Process - Beware the coach who offers a canned program of assistance, one-size-fits-all. The coaching should be bespoke: tailored to the individual's specific needs and circumstances. This means that a thorough assessment process should precede efforts at intervention. It is invaluable, I have found, to include others in that assessment process, such as risk managers, desk managers, MDs, and others coordinating the work of traders.

* Emphasis on Limited, Measurable Goals - If there's one thing that has given coaching a bad name, it's a reliance on buzz words and psychobabble in place of validated methods directed toward measurable aims. Both coach and client should be able to verbalize their specific aims, what they will be doing to reach these, and how they'll know if they're achieved.

* Professionalism and Experience - Who is the coach ultimately working for: the client firm or the trader? How will confidentiality be handled? What feedback will be given to managers of the trading firm? If more specialized help is required (e.g., a psychiatrist), how are referrals handled? How does the initial assessment identify problems that would out outside the coach's scope of practice? An experienced, professional coach will have thought through these issues carefully.

My personal preference is for services that enable traders to become their own trading coaches, rather than dependent upon an external coach. As a helper, that takes me down the path of direct skills teaching, rather than talk counseling. Ultimately, however, what is most important is the fit between the personality and needs of the trader and the style and methods of the coach. Firms should not be hesitant to audition many prospective coaches before settling on one or more to make available to their talent.


Relevant Readings:

Performance Coaching: When It Works, When It Doesn't

Trading Coaches: What Works

Trading Mentors and Coaches: A Resource Linkfest

How Traders Can Become Their Own Coaches

A Unique Financial Blog Site and Data Source

I greatly enjoy exploring new trading resources; so much new is developed all the time. One excellent blog site that I've been visiting is Between the Hedges. This site does a great job of wrapping up the market at the end of a day/week and preparing for the coming day. Gary also tracks the performance of his own portfolio and combs through interesting sources of financial data that may not be familiar to traders. His exhaustive collection of links includes sources of economic and market data, as well as news from around the world. He also provides links to a variety of screening tools and sources of information on individual stocks.

Some of the more interesting data sources linked by Between the Hedges are Hot Spots, Chart Toppers, Option Dragon, Market Gauges, and a heatmap of style performance.

Hats off to Gary for an excellent resource.

When Large Cap Stocks Outperform Small Caps

Over the last ten trading sessions, we've seen solid gains in the Dow Jones Industrial Average (DIA; up over 4%), but more muted gains in the small-cap Russell 2000 Index (IWM; up about 1.3%).

I went back to 2004 (N = 825 trading days) and found 81 occasions in which the Dow was up more than 2.5% in a 10-day period. When the Dow was up strongly and outperformed the Russell (N = 29), the next five days in the Russell (IWM) were up by an average of .66% (21 up, 8 down). On the other hand, when the Dow has been strong but the Russell has been stronger (N = 52), the next five days in the Russell (IWM) averaged a gain of only .05% (27 up, 25 down).

It thus appears that, when the Russell has underperformed a strong large cap Dow over a 10-day period, it has tended to play catchup over the following week. As I'm writing this (9:13 AM Monday morning), the Russell is continuing to underperform the large caps. I'll need to see some signs of selling drying up (rising NYSE TICK lows and negative TICK unable to push IWM to new lows) to act on this pattern.

It's when real-time action confirms historical patterns that particularly good things can happen.

Free Interactive Webinar on Trader Performance

Steven Buss, a member of the NeoTicker forum, has kindly offered to host me for a free two-hour online presentation and discussion of issues related to the enhancement of trading performance. Please make note of the date Sunday, May 6th and the time: 8:00 AM EST; 7:00 AM CST. Yes, it's early in the morning, but this is to make the session accessible for our colleagues in Europe and Asia.

During the Webinar, I will summarize and elaborate basic ideas from my book and also introduce new ideas developed and applied since the book's publication. A unique feature of the session will be a participant Q&A moderated by Steve.

Registration is required; your information will not be used for any commercial purposes. My hope is that the session can help you identify your own strengths and weaknesses, so that you can become more intentional in your own development as a trader. Please note that this is a completely non-commercial presentation; there will be no advertisements, solicitations, or infomercial content.

Here are a few readings relevant to the Webinar topic:

Trader Performance: What Contributes to Profitability

Three Trading Psychology Myths

Resilience and the Courage of Your Convictions

Six Keys to Trading Success

Hope to see you there! Thanks for the interest--

Brett

XLK and Money Flows for Technology Stocks

Our last look at the Technology sector found that it held up well in the face of the late February/early March market weakness, with waning 10-day adjusted relative dollar volume flows preceding the decline. Since that time, we've had a rebound in flows (pink line) to above average levels (red line), powering the Technology ETF (XLK; blue line) to fresh bull highs.

The five highly weighted stocks within XLK that I use to compute the flows are MSFT, INTC, IBM, CSCO, and VZ. Together, these issues comprise about 40% of the index.

Of the five stocks, we see slightly negative 10-day flows (i.e., slight outflow of dollars) in CSCO. CSCO is also showing 10-day flows below its 200-day moving average. VZ is displaying positive flows, but rather well below its 200-day average. MSFT is the only stock that has shown outflows over the 200-day period, but--over the past ten sessions--has been attracting dollars. That's worth keeping an eye on.

Overall, the dollar volume flows within the Technology sector are positive, but not overly impressive. If we continue to see a tailing off of the 10-day levels, I'd expect to see some consolidation among these stocks.

XLF and Money Flows for Financial Stocks

The last time we visited the Financial sector, we found waning adjusted relative dollar volume flows leading up to the late February/early March decline. Since that time, we can see that 10-day flows (pink line) have returned to above average (red line), but that the sector price (XLF; blue line) has yet to register fresh bull market highs.

The five highly weighted stocks within XLF that I use to compute the dollar flows are C, AIG, BAC, WFC, and JPM. Together, they account for about 36% of the index.

Of these five, only BAC is showing a 10-day level of flows below its 200-day moving average. Those flows are still quite positive, however. The strongest inflows are occurring within AIG, which seems to be attracting significant institutional interest. There is absolutely no sign of money fleeing this sector, as flows for all the stocks are strong.

As long as we have expanding dollar inflows to the Financial stocks, I expect price to continue higher. We normally see some tailing off of those flows prior to any significant correction. While XLF has been underperforming other S&P sectors of late, it has still been quietly accumulating institutional assets.

XLV and Money Flows For Healthcare Stocks

Our last visit to the Healthcare sector found waning adjusted relative dollar volume flows leading to the late February/early March market decline. The Healthcare ETF (XLV; blue line) has moved sharply higher since that time, making fresh bull market highs. Flows (pink line) moved above average (red line), but not by as much as the price rise might suggest.

The five stocks highly weighted within XLV that I monitor for money flows are PFE, JNJ, MRK, LLY, and AMGN. Together, they account for over 45% of the index.

Over the past ten days, average dollar volume flows have been positive for all five stocks. There is no evidence of money systematically abandoning the Healthcare sector. Of the stocks, only AMGN is slightly below its 200-day moving average for flows; all the rest are displaying above average institutional interest over the past 10 days. MRK is the clear leader in dollar volume flows, with notable recent interest.

While the price rise in XLV is impressive, I'm not convinced that the recent rise has been attracting significant fresh capital. I will be watching carefully to see if this leads to some price consolidation among these issues.

XLE and Money Flows for Energy Stocks

Our last visit to the Energy sector within the S&P 500 index found some price consolidation and waning adjusted relative dollar volume flows. Since that time, we can see that the 10-day average flows (pink line) have moved well above the 200-day average (red line), supporting higher prices in XLE (blue line).

The five stocks highly weighted within XLE that I use for the flow calculations are XOM, CVX, COP, SLB, and OXY. As a group, those five stocks account for about half of the XLE index as a whole.

Of the group, only XOM is currently showing flows below its 200-day average. Those flows, however, still are quite positive. There is absolutely no evidence of dollars exiting this sector.

We're currently seeing unusually strong dollar inflows into CVX and SLB, but all four remaining stocks are showing 10-day flows well above their 200-day averages. It appears that institutions are putting fresh capital to work in Energy stocks. This is contributing to new bull market highs for the sector.

As mentioned before, I generally expect trends to continue when money flows are expanding, and there is a tendency for 10-day flows to peak ahead of price. For those reasons, it would not surprise me to see further price strength ahead for the Energy sector.

Here Are Sunday's Blog Links and Market Views

XLP and Money Flows for Consumer Staples Stocks

Our last look at the Consumer Staples sector of the S&P 500 stock universe found a solid runup in price on above-average adjusted relative dollar volume flows. Even during the market weakness of late February/early March, money flows for the Staples stocks remained average or above.

In the chart above, we can see that the sector ETF (XLP; blue line) has since risen to new highs, with the 10-day average of adjusted flows (pink line) moving smartly above the 200-day moving average (red line). During the recent run to new highs, there has been a deceleration of money flows into the sector, but these have remained above average nonetheless.

The five highly weighted stocks within XLP that are included in the flow calculations are PG, MO, WMT, KO, and WAG. All five show net dollar inflows over the past 10 trading sessions and all but MO are displaying flows above the 200-day average. WMT, interestingly, is showing particular recent inflows relative to the average. Although the 10-day flows for MO are below the 200-day average, they are still solidly positive.

As long as flows remain above average for the Consumer Staples stocks, I expect further price gains. This sector has been a major beneficiary of recent strength in the S&P 500 Index. With further deceleration of flows, it would not be surprising to see some price consolidation. This is something I'll be watching carefully.

XLY and Money Flows for Consumer Discretionary Stocks

Our last visit to the Consumer Discretionary sector of the S&P 500 stocks found a sharp rise in adjusted relative dollar volume flows, followed by a tailing off of money flow and eventual participation in the market drop of late February/early March.

We can see from the chart above that, since then, money flows into the Consumer Discretionary stocks have been quite modest. Indeed, we see that the sector ETF (XLY; blue line) has not made a new high during the recent rally. Similarly, adjusted relative dollar volume flows (pink line) have barely budged above the 200 day moving average (red line), despite strong flows in other sectors (such as Industrials).

The five highly weighted stocks within XLY that I use to calculate the flow data are CMCSK, TWX, HD, DIS, and MCD. Of the group, we have outright negative flows over the past ten trading sessions in CMCSK and DIS. Both also display flows below their 200-day moving average. The only stock in the group with strong inflows is MCD, which has shown consistently positive flows over the past month.

The inability of the Consumer Discretionary stocks to attract greater interest during a strong market period leads me to question how the sector will hold up during an eventual market correction. DIS, in particular, strikes me as undergoing institutional distribution: six of its last ten trading sessions have displayed net dollar outflows.

XLI and Money Flows for Industrial Stocks

Our last look at the industrial stock sector of the S&P 500 universe found a steady decline in adjusted relative dollar volume flows leading up to the late February/early March market weakness. Since that time, we've seen a solid rebound in money flows, with recent readings well above the sector's 200-day moving average.

The above chart shows that we've hit fresh price highs in the industrial sector ETF (XLI; blue line) and that dollar volume flows (pink line) are expanding and well above the average level (red line).

The five highly weighted stocks in XLI that I use to calculate the flows are GE, UPS, BA, UTX, and MMM. Each of the five is showing very positive relative dollar volume flows, and each is showing flows well above their 200-day moving average. MMM and UPS are showing the strongest inflows of the group; none are weak.

As long as institutions continue to put money to work in this sector, I'd expect to see higher prices in the near term. As a rule, we see a waning of inflows prior to significant sector tops.

XLB and Money Flows for Materials Stocks

The last time we visited the Materials stocks within the S&P 500 Index, we found that--despite the sharp market drop--adjusted relative dollar volume flows into the sector remained positive.

The chart above updates adjusted relative flows (pink line) vs. the XLB sector ETF. What we see is that the sector has made new price highs following the market decline, but that flows among the materials stocks have been waning.

Note that the pink line is derived from cumulating the adjusted relative dollar volume flows from five stocks very highly weighted within XLB: DD, DOW, AA, IP, and WY.

The horizontal red line represents the level of flow equivalent to the 200-day moving average. We can see that, while money flows have decelerated for the sector, they have not moved significantly below average. There is still money flowing into the Materials stocks, just not at as swift a rate as earlier.

Given the decelerating flows as prices have risen, I would not be surprised to see a modest correction in the sector. Rallies tend to be sustained when higher prices attract more, not less, capital.

Within the five stocks, DD and IP show the strongest relative flows overall; WY the weakest. All, however, are positive, indicating that money is not leaving the sector. On an adjusted basis (i.e., comparing the recent 10 days to the prior 200 sessions), DD is strongest and DOW is the only one below its average.

If the economy were headed toward recession, one would think that demand for raw materials would decline and that this would be reflected in dollar flows into the sector. Thus far, the materials sector shows no such weakness, though it may consolidate its gains from here.

Overview of the Relative Dollar Volume Flow Indicator

Before I post a sector-by-sector analysis of relative dollar volume flows into the various segments of the S&P 500 Index, I want to head off questions by reviewing the logic behind the relative dollar volume flow indicator. For background, here is my initial post on the topic; here is a nice illustration of the pattern of flows that preceded the big market drop in late February/early March; and here is a post that illustrates flow patterns at market bottoms. An illustration of flow in the S&P stocks also illustrates trading patterns.

Here is how I compute relative dollar volume flow for a particular stock:

1) The indicator begins with a calculation of money flow (net dollar volume). Money flow is calculated by multiplying the price of the stock times the volume traded for each trade during the day. If the price occurred on an uptick, the dollar volume is added to a cumulative total. If the price occurred on a downtick, the dollar volume is subtracted from the total. At the end of the day, you have the net dollar volume for that day.

2) I then adjust money flow for the volume traded that day. Because actively traded stocks would be expected to generate larger net dollar volume flows than less active, smaller ones, I create a more apples-to-apples comparison by dividing the money flow (net dollar volume) by the total share volume traded on that day. Hence the term relative dollar volume flow. If a large portion of a stock's daily volume occurs on upticks, for example, relative dollar volume will be very high--even for a low volume stock.

3) Then I see how recent relative flows compare to past flows. My research suggests that it is the acceleration and deceleration of relative dollar volume flows that are important to track for determining short/intermediate-term market strength or weakness. As a result, I subtract from each day's relative dollar volume flow the average relative dollar volume flow for the prior 200 trading sessions. This tells us whether we have above- or below-average levels of flow, with zero representing a level of flow equivalent to that of the past 200 days.

4) I track a short-term moving average of adjusted relative flows. My charts display a 10-day average of this adjusted relative dollar volume flow for purposes of smoothing. We're thus seeing how relative flows over the past 10 days compare with those over the prior 200 days.

I have received many requests from traders to help them set this up themselves, adapt the indicators in various ways, etc. Unfortunately, my time demands don't permit me to fulfill these requests. What I can tell you is that I receive raw money flow data from Townsend Analytics' RealTick platform, transfer the data to Excel, and conduct all calculations and assemble all charts in Excel.

For those sane individuals not inclined to gather all this information themselves, I report the adjusted relative dollar volume for the 30 Dow stocks every day in the Trading Psychology Weblog. I also periodically summarize the flows into and out of the S&P sectors on this site.

Finally, on a personal note that I will be expanding upon in this weekend's entry into my Trader Performance page, I am finding the patterns in the strength (new high/low); momentum (Demand/Supply); sentiment (Adjusted TICK); and relative dollar volume flow indicators to be so strong that I am making major changes in my own trading. I hope to share the results of these changes in future posts. I will also be taking a future look at intraday readings of flows--a much more ambitious research undertaking.

Here Are Saturday's Links and Market Views

Money Flows Into the Dow Jones Industrial Stocks

Here's an update of relative dollar volume flows into the 30 Dow stocks as of the close of Friday, April 27th. Recall that we're assessing the dollar volume on upticks minus that on downticks each day for each stock and then expressing that dollar volume as a proportion of the total volume traded that day. The blue line represents the Dow Jones Industrial Average (DIA); the pink line is a 10-day moving average of relative dollar volume flows (current flows minus the average flow over the past 200 trading sessions). The red horizontal line at the zero level thus represents the average level of dollar volume flow over the past 200 days.

You can see that, overall, we've had above average relative flows into the Dow stocks, supporting the recent rally. Note how dollar volume flows tailed off prior to the late February-March drop; that, so far, has not occurred in the present market. Accordingly, I'm not looking for any significant, extended corrections at this point in time.

The individual Dow stocks with outright negative flows during the month of April so far are DIS and JNJ. We're seeing relatively low positive flows in GM, MSFT, T, VZ, and XOM. The latter is interesting, because oil prices (and stock prices of oil companies) have been high.

We're seeing very strong April flows into INTC, HON, JPM, KO, WMT, and HD. I find the latter especially interesting, given the housing weakness story.

I continue to hear from many traders, most of whom make the bear case. I agree with most of what they say regarding politics, the economy, etc. The fact remains, however, that institutions are putting funds to work in stocks. That's a tide I'm not willing to swim against.

Tomorrow we'll look at the flows in the various sectors within the S&P 500 Index and what those might be telling us about his market.