Sunday, March 11, 2007

Where's The Flow? XLI And The Industrial Stocks

Thus far we've looked at Adjusted Relative Dollar Volume Flows for several sectors within the S&P 500 large cap universe, including materials, financial, technology, energy, consumer discretionary, and consumer staples stocks. We've also tracked volume flows for the S&P 500 Index as a whole. Now we ask the WTF question about industrial stocks, as represented by the XLI Spyder sector ETF. As with the other sectors, I've chosen five stocks that dominate the ETF to gauge dollar flows. These include GE, UPS, BA, UTX, and MMM.

The above chart, going back to January, 2004, shows us the price of XLI (blue line) vs. the ten-day average Adjusted Dollar Flows for the group of industrial stocks (pink line). When the pink line is above the zero level (horizontal red line), it means that dollar volume flows into the industrial sector are above average (relative to their 200-day average). When the pink line falls below the zero level, it means that we have below average dollar flows into the sector.

Patterns that we've seen among the other sectors are also evident among the industrial shares. We can see a surge of dollar flow into the sector in September, 2006 followed by higher prices. We also see waning peaks in dollar volume flow leading to the price peak in February, 2006, by now a familiar pattern.

Notice how the recent market decline has led to persistent subnormal dollar volume flows into the industrial sector. Indeed, only 2 out of the last 20 trading sessions have shown above-average flows. What that tells us is that, even with the recent drop in prices, large market participants are not putting money to work among the industrial shares. Until we see evidence of such interest, it is premature to call a bottom in this sector.