Sunday, March 11, 2007

Where's The Flow? XLV And Health Care Stocks

This will be the last of the eight S&P 500 large cap sectors that we evaluate for Adjusted Relative Dollar Volume Flow. I will be posting future updates for the sectors, as well as for the Dow and S&P 500 indices, to the Trading Psychology Weblog. Recall that, to this point, we've looked at materials, financial, energy, technology, consumer discretionary, consumer staples, and industrial stocks. We've also taken a look at dollar volume flows for the S&P 500 Index as a whole. Now we'll ask the WTF question about health care stocks, as represented by the XLV sector Spyder ETF. As with the prior analyses, I selected five stocks that dominate XLV to assess dollar volume flows: PFE, JNJ, MRK, LLY, and AMGN.

The chart above, going back to January, 2004, shows price for XLV (blue line) against the ten-day average Adjusted Relative Dollar Volume Flow for the health care stocks (pink line). As before, when the flow line is above the zero level (horizontal red line), it tells us that above average dollar volume flows are entering the sector. Conversely, when the flow line dips below the zero level, it signifies subnormal dollar volume flows into the health care stocks.

Our familiar pattern once again appears in the recent data: we saw a steady decline in the dollar volume peaks leading up to the February, 2007 price peak in XLV. This pattern has also shown up during prior topping processes in the sector. We can also see that, in the wake of the recent market decline, Adjusted Dollar Flows have been subnormal in the health care shares, but only modestly so. Out of the last eight trading sessions, four have shown below average dollar flows and four have shown above average flows.

What we might conclude from these data is that buyers have not yet jumped in at lower prices to embrace the health care stocks, but neither have they sold them aggressively. This is in keeping with the hypothesis that, during the decline, investors have been relatively risk-averse, preferring defensive market sectors over growth-oriented and more volatile ones. Until we see evidence of above-average flows returning to the health care issues, however, it is premature to call a market bottom in the sector.