Dow Returns Following Extreme Money Flow Days

My recent post found that there have been above average returns since 2005 when we have had 20-day periods of very strong or very weak dollar volume flows in the Dow 3o industrial stocks. But how about a single day of extreme dollar volume flow? Do very strong institutional flows into or out of stocks during a single session affect near-term returns?

I went back to June, 2004 (N = 711 trading days), which is currently as far back as I've taken my money flow database. I calculate Relative Dollar Volume Flow by comparing dollar volume flows to their 200-day moving average. When we have had very strong inflows (Relative Dollar Volume Flow > 2.0; N = 60), the next three days in the Dow Jones Industrial Average (DIA) have averaged a solid gain of .20% (39 up, 21 down). Conversely, when we've had very weak flows (Relative Dollar Volume Flow < -2.0; N = 50), the next three days in DIA have averaged a strong .35% (32 up, 18 down). By contrast, all remaining occasions in the sample average a three-day DIA gain of only .05% (318 up, 283 down).

I will continue to investigate. So far, it appears that money flow data are mediating a momentum effect when flows into stocks are strong and a reversal effect when flows out of stocks are weak. When flows into stocks are strong, strength is likely to be followed by further strength. When flows out of stocks are strong, this represents a broad risk aversion and is followed by superior returns. Weak flows may be more typical of consolidating markets and thus yield subnormal returns over the short run. Clearly it would be interesting to see if these patterns hold during bear market periods and if they hold for individual equities.

Automatically Update Your Reader With New TraderFeed Posts