Saturday, July 14, 2007

Going Without the Flow: The Changing Dynamics of this Bull Market

In my last post, I summarized indicators that suggest that the current market is not as strong as the recent move to bull highs might suggest. The chart above, showing the Dow Jones Industrial Average (DIA; blue line) plotted against raw 5-day money flows for the 30 Dow stocks shows why this is the case.

Note that the rising action of the Dow in late 2006 and early 2007 was accompanied by breakout highs in money flow. This means that large volume tended to be transacted at the market offer rather than the bid, indicating aggressiveness among institutions in owning stocks.

During the recent move to new highs, however, money flows have been consistently weak. Indeed, every day out of the last six has seen flows below the 200 day average. Of the 30 Dow stocks, only INTC, JNJ, MSFT, and WMT display positive 10-day money flows that are above their 200 day averages. (HPQ comes close).

On the other hand, we see 10-day net dollar outflows from AIG, DIS, KO, and (interestingly) XOM.

What this means is that we're still seeing money coming into stocks, but it's a relative trickle compared to the torrent experienced earlier.

This very much fits with the recent, weak NYSE TICK data, which shows that--across the broad stock universe--traders have been hitting bids despite the rising large cap index prices. It also helps to explain why, as of Friday, we were seeing 1421 new 20-day highs, but also a surprisingly high 612 new 20-day lows.

In sum, I don't see the recent market rise as indicative of a broadening demand for stocks. Instead, strength appears selective, with money flows most positive among large cap tech stocks. Just as I doubted the sustainability of market dips over the past several months in the face of strong money flows, I question the sustainability of market rallies in the face of weak flows. While that doesn't necessarily mean a bear market is in the offing, it does raise the possibility of returning to the lengthy trading range we've experienced since May.


What's Behind the Bull Market: Money Flows

Relative Dollar Volume Flows

Ten Principles of Short-Term Trading