Friday, April 06, 2007

A Tale of Two Stock Market Sectors

Here's an update on some of my research on dollar volume flows within sectors. A prior update on eight sectors within the S&P 500 stock universe found considerable variation in the dollars flowing into the various sectors. In the charts above, we can see a particularly strong contrast between two sectors as of 4/5/07: the consumer staples stocks and the financial stocks.

Note that relative dollar volume flow for the staples stocks barely pushed below zero even during the recent market decline. Recall that a zero level reflects a level of money flow equivalent to the 200-day average for that sector. What the chart of the Consumer Staples stocks is telling us is that we've had consistently above average flows into those issues. As a result, it's not surprising that we're knocking on the door of bull market price highs for the XLP ETF.

When we look at the Financial sector, however, we can see that dollar volume flows have stayed below average, even as the general market has bounced from the recent decline. Price of the XLF sector ETF has also stayed well below its highs as a result.

As a matter of contrast, over the past ten trading sessions, nine have shown above average dollar volume flow among the Consumer Staples issues. Over that same period, only two sessions have resulted in above average volume flow for the Financials.

Volume flows do seem to make a difference. According to the Decision Point site, about 78% of Consumer Staples stocks are trading above their 50-day moving averages. Only 49% of Financial stocks are trading above that benchmark.

What I take away from this is that we have a defensive market. Perhaps out of fear of continued housing weakness, recession, and subprime loan challenges, investors are shunning financial issues. They are putting their money to work in relatively recession-resistant sectors, such as Staples and Materials.

A rising tide is supposed to lift all boats. While we're not seeing outright dollar outflows from Financials, we're also not seeing meaningful participation in market strength. Given the importance of the financial sector to the S&P 500 Index, I suspect we'll need to see some broadening of those volume flows if we're to get another leg to the bull market.