Saturday, March 10, 2007

Where's The Flow? XLY And Consumer Discretionary Stocks

Recent posts have looked at Adjusted Relative Dollar Volume Flows for the materials, financial, energy, and technology stocks. We've also seen how these flows reflect sentiment within the S&P 500 and Dow 30 Industrial stocks. A number of patterns have emerged from this view, as well as some insight into how flows have behaved relative to the recent market drop.

In this post, we're asking the WTF question--Where's The Flow?--about the Consumer Discretionary sector, which is represented by the XLY Spyder ETF. To track dollar volume flows, I've focused on five stocks that dominate the sector ETF: CMCSK, TWX, HD, DIS, and MCD. As with the recent posts, the blue line represents price for the XLY ETF. The pink line captures the 10-day average Adjusted Relative Dollar Volume Flow for the five issues. When we have flows above the horizontal red line--the point at which current flow equals the average flow over the past 200 days--that tells us that we have above average dollar flows into the sector. When flows are below the red line, we can see that dollar flows are below average.

Notice that a surge of dollar volume flowed into the Consumer Discretionary stocks in October, 2006, powering a strong advance in that sector. One of the patterns I am looking at with the dollar volume flow data is breakouts/surges in flow and whether these precede sector rallies and declines. We can see that dollar flows diminished as we made a price peak in February of this year, a pattern noted among the other sectors.

Interestingly, dollar flow has turned negative (subnormal) in the wake of the recent market decline, but not nearly to the extent that we've seen among other sectors (financial, energy, technology). There is little evidence of large market participants bailing out of the Consumer Discretionary stocks. Conversely, since the large decline, we don't see evidence of above-average flows returning to the sector. The best way to describe the situation is that we see modest buying and selling interest over the last two weeks. Out of the last 10 trading sessions, only 3 have seen above average dollar volume flows in the sector.

Once again, that suggests that investors are not leaping into Consumer Discretionary shares even after the broad market decline. We'll need to see concrete evidence of above average dollar flows into the sector before concluding that the sector's weakest days are behind it.