Saturday, April 26, 2008

Money Flow Into the Financial Sector

Money flow is a measure of the dollar volume that is moving into or out of individual equities. When a stock trades on an uptick, the price of the trade times the volume of that trade (i.e., the dollar volume) is added to a cumulative total. When the stock trades on a downtick, the dollar volume is subtracted from the total. By the end of the day, if the total (i.e., daily money flow) is positive, it means that dollars have been flowing into the stock--there has been net buying interest. If the total is negative, then money has been flowing out of the stock, suggesting net selling interest.

If we aggregate the daily money flow figures for individual stocks, we can make inferences as to the money flowing into and out of particular sectors and even the broad market. This is why I track money flows for the 30 Dow Industrial stocks. By examining flows from sector to sector, we can gain a more refined perspective on how funds are flowing *within* the stock market. This is invaluable information for stock pickers.

Note that we can view money flow as a sentiment measure, not unlike the NYSE TICK and Market Delta measures emphasized in the recent webinar. We're using activity at the market bid to indicate an aggressiveness among sellers and activity at the market offer to indicate initiating interest among buyers. By aggregating this behavior over the course of a day and then examining the flow of funds across days, we can detect shifts in sentiment toward stocks and sectors.

With that in mind, we can see from the above chart the financial sector of the S&P 500 Index (XLF) plotted against a five-day moving average of money flows for the ten stocks most highly weighted in XLF. Those stocks are: BAC, C, JPM, AIG, WFC, GS, WB, USB, AXP, and MS. The chart is constructed in Excel from data derived from Townsend's Real Tick platform.

As with the earlier post on money flow with the Dow stocks, we can draw two conclusions with respect to the financial sector:

1) Outflows have been waning since the January market low;

2) We have not seen massive dollar inflows into the sector.

To be sure, we *have* seen net dollar inflows into the financial shares since the start of April. These inflows, however, are not as great as those we saw at sector bounces in November, 2007 and late January, 2008. The good news is that steps taken by central banks and recapitalization efforts by banks have stemmed selling within the financial sector. The bad news is that those developments have not, as yet, led to broad-based buying of financial shares.