Tuesday, June 05, 2007

Is Money Flow Making This Market Go?

The market's rise continues apace. On Friday, we saw 1129 stocks make fresh 65-day highs across the NYSE, NASDAQ, and ASE. That is the highest level we've seen since mid-April. This is a function of the renewed strength among the small cap stocks, which had been lagging large caps. Despite a number of divergences in the market data and strong interest rates, we've been able to hold off a significant correction to this point.

The chart above helps to explain why. Only very recently have we seen money flows in the 30 Dow Industrial stocks (pink line) move below their 200-day average (the zero line on the chart). Flows thus far have not only been positive, but above the average level we've seen *during a bull period*. When institutions are pouring money into stocks, it is difficult to sustain a correction.

Note that dips below the zero line--periods of below average money flow--have represented good buying opportunities in the Dow (DIA; blue line).

I decided to look at the past 10 trading sessions and compare those to the past 200 trading days. Dow stocks showing positive 10-day flows that are above their 200-day average include AA, BA, CAT, DD, GM, JPM, KO, MMM, MO, MRK, PG, UTX, VZ, and XOM. Notice the preponderance of old line industrial names.

Dow stocks with outright negative flows over the past 10 trading sessions include MSFT, JNJ, and INTC.

Money flows have slowed in recent days, but remain very close to average. That average has been sufficient to sustain a market uptrend. Until we sustain below average readings, it's difficult to expect a major market correction. The adjusted relative dollar volume flows have proven their worth in my own trading, as they've consistently reflected the recent market strength.


Overview of Relative Dollar Volume Flow