Friday, March 09, 2007

Where's The Flow? XLF And The Financial Stocks

In my recent post, we looked at Adjusted Relative Dollar Volume Flow into the materials stocks and found that that sector was attracting capital in the wake of the recent selloff. In this post, we take a similar look at XLF, the Spyder ETF covering the financial stock sector, and we ask the WTF question: Where's The Flow among financial issues? Each of these are sectors within the S&P 500 large cap universe; the flow measure shows us sentiment among large traders of those stocks.

As before, I've taken five of the stocks most heavily weighted in XLF and calculated daily Dollar Volume Flows for each issue and the group as a whole going back to January, 2004. The five issues are C, AIG, BAC, WFC, and JPM. The chart above represents the 10-day moving average of the Adjusted Relative Dollar Volume Flow for the five financial issues vs. the daily closing price for XLF. The Adjusted Flow is the difference between each daily Flow reading and the 200 day moving average value for flow. The solid red horizontal line at the zero level represents the point at which 10-day flow equals the 200-day average. Thus, values below the red line represent below average dollar volume flow; values above the red line represent above average dollar volume flow.

Once again, we can see patterns in the data similar to those observed among the materials stocks. Price peaks in XLF tend to be preceded by peaks in the Adjusted Relative Dollar Volume Flow. Divergences are evident during the topping process early in 2005; May, 2006; and most recently prior to the February, 2007 peak. We can also see that dips into negative territory have marked intermediate-term bottoms in XLF.

Unlike the materials stocks, however, we've seen a shift toward negative Adjusted Flows among the financial stocks. Indeed, looking at the data for the individual days, we find that flows have been subnormal for 11 out of the last 12 trading sessions. In other words, in the wake of the large market decline, we have not yet seen a resurgence of buying among large traders in these financial issues. That suggests that these large market participants are not yet finding good value in the lower prices, which could lead us yet lower in this sector.