Saturday, February 16, 2008

Money Continues to Flow Out of Stocks

Relative Adjusted Money Flow is a proprietary indicator I use to see if institutional volume is entering or leaving the stock market. Above, you can see the five-day money flows for the 30 Dow Industrial stocks (pink line), plotted against the Dow ETF (DIA; blue line) from November to the present. For a description of how I calculate relative flows, please consult this post. I apologize that I cannot respond to questions about this research.

The money flow figures are relative in that they compare current adjusted flows (dollars flowing in and out of stocks adjusted for the volume traded that day) for the 200-day average flows. Thus, the number to look at is the zero line on the above chart. When the flow numbers are above zero, it means that--relative to the past 200 day average--we're seeing more money flowing into Dow stocks. When we're below zero, it tells us that, relative to the past 200 trading sessions, money is flowing out of Dow issues.

Please note that this is a very labor intensive indicator that measures every trade in every Dow stock each day to determine whether volume is at the current bid vs. offer price. Because large volume is indicative of institutional interest, the money flow figures are quite helpful in determining the buying and selling of the market's largest participants.

As we can see from the chart above, the five-day moving average of flows has been pretty consistently below the zero line and remains there now. While we have had a nice bounce off the January lows, I do not yet see evidence of sustained institutional buying among the large caps that make up the Dow.