Friday, June 22, 2007

Catching Up With The Stock Market: Part One - Dollar Volume Flows

As you know from my recent post, I've been away from the markets for a while. Let's turn that into an opportunity, so that I can illustrate how I use the various indicators from this blog to assess the market's prospects.

One of the major points I tried to make in my posts on trading like a scientist is that science begins with intensive observation. We then look for patterns in those observations and arrive at tentative explanations for those patterns. When we're trading, we're really testing our understanding by hypothesizing that patterns observed in the past will persist in the near-term future because the drivers of those patterns have not materially altered.

So when we've been away from markets for a while, what we want to do is observe, observe, observe.

Above is a chart of money flows into the 30 Dow Industrial stocks from 1/3/06 to 6/21/07. Several observations are relevant:

1) Money Continues to Flow Into This Market - The 200 day average of raw dollar volume flows into the Dow stocks has been in a sustained uptrend. The pullbacks in relative dollar volume flows (how 10-day flows compare with their 200-day average) have occurred at successively higher prices.

2) The Pace of Money Inflows Has Slowed - Of late, we've been oscillating around the zero level on the above chart, which means that money flows have been equivalent to the 200-day average. That is a slowing of inflows from the torrid levels of late 2006, but still a level of investor interest in stocks that has been associated with rising prices.

3) Flows Have Been Solid For Most Stocks - Dow stocks with positive inflows above their 200-day average include: AIG, BA, C, CAT, DD, GE, GM, HON, IBM, JNJ, JPM, MMM, MO, MRK, PG, UTX, VZ, and XOM. Those with positive inflows but below their 200-day average include: AA, AXP, HPQ, MCD, MSFT, T, and WMT. Dow issues with net outflows include: DIS, HD, INTC, KO, and PFE.

4) Strong Sectors Continue Strong - We're seeing fine, consistent inflows into oil/energy stocks such as XOM. Above average money flows have supported good price moves in CAT, GE, GM, and UTX.

In sum, the money flow data are neither supportive of the bears, nor are they roaringly bullish as in late 2006. Money continues to flow into Dow stocks and, as of Thursday, 18 of the Dow 30 issues are sporting 10 day flows above their 200-day average. That continues to support the policy of buying pullbacks in overall Dow flows below the zero line as long as those occur at higher price lows. But let's gather more observations before jumping to conclusions. My next post will examine the new highs/lows and stock momentum.


Overview of the Dollar Volume Flow Indicator