Saturday, April 26, 2008

Money Flow Into the Consumer Discretionary Sector

My last post took a look at money flows within the financial sector of the S&P 500 large cap stock universe. (See that post for an explanation of money flow and how it is calculated).

The financial sector is especially important to market sentiment, given the concerns we've had over bank losses and credit quality.

A second sector I'm following closely is the consumer discretionary stocks, which are sensitive to consumer behavior--and hence the impact of recession. If the stock market is looking past recession to a recovery, we should see inflows of capital to the consumer discretionary area. If the market is anticipating deepening and more prolonged recession, however, we should see outflows from these shares.

The chart above depicts five-day money flows vs. the XLY (consumer discretionary) sector ETF. The flows are based upon the ten most highly weighted stocks within XLY. These are: MCD, DIS, CMCSK, TWX, HD, NWS, TGT, LOW, NKE, and VIA.B.

We can see a pattern in the money flows for consumer discretionary issues that is similar to the one we observed with financials and with the Dow Industrials stocks overall. Going into the January lows, we saw consistent outflows from the consumer discretionary sector and then sustained buying during late January and February. Outflows diminished with the March lows and, since early April, we've seen resumed inflows to the sector.
This pattern of waning selling sentiment since the January lows is confirmed by new high-new low data for the stock market overall and by my work on the Cumulative NYSE TICK. It is fair to say that the various measures taken to assist the economy, from rate cuts to infusions of capital into banks and fiscal stimulus, have stemmed selling pressure in the market.

It is also clear, however, that these measures have not generated significant inflows into stocks. While we've seen net inflows to the consumer discretionary area since the start of April, the most recent price strength in the sector has not been accompanied by meaningful dollar flows. The February rally in XLY failed when price highs late in the month came on diminished capital inflows. A similar pattern may be showing up during April's market. XLY has moved to new price highs, but money flows to the sector are lagging.

It is one thing to see a drying up of selling; it's another to sustain buying. So far we've seen a notable decrease in selling manifested across several sentiment measures. Buying sentiment, on the other hand, remains muted of late--something we will need to track as we trade at an important area of long-term price resistance in the broad market.