Thursday, April 24, 2008

Money Flows Into the Stock Market and What They're Telling Us

Quick review: dollar volume flows take every trade in every stock (in this case in the Dow Industrials) and multiply the price of the trade times the volume of the trade. If the trade occurred on an uptick, the dollar volume is added to a cumulative sum. If the trade occurred on a downtick, the dollar volume is subtracted from the sum. I then add the figures for all 30 Dow stocks to arrive at an estimate of dollar inflows and outflows for the broad large cap market. A positive figure for this money flow indicates capital being put to work in stocks. A negative figure suggests capital being withdrawn from stocks.

In the chart above, we see dollar volume flows into the Dow Jones Industrial stocks (pink line) plotted against the Dow Jones Industrial Average (DIA). Two immediate findings stand out from the chart:

1) Since the January lows, outflows from the Dow stocks have moderated;

2) Since the March lows, we have not been able to sustain significant inflows.

As we can see from the light blue line representing zero inflow/outflow, the five-day average of money flows is only slightly positive at present--and that was due to one solid day of inflows. After some sharp inflows following the January lows, we simply have not been able to keep money coming into the Dow issues.

The result of this has been a stalling of the market rise that began with the March lows. That stalling is visible in a number of the current market indicators. On Wednesday, for instance, we had 780 NYSE, NASDAQ, and ASE issues make fresh 20-day highs, but 723 register new lows. My measure of technical strength across the 40 stocks in my basket, drawn equally from eight S&P 500 sectors, shows 22 stocks in uptrends, 8 neutral, and 10 in downtrends. Three of the ten stocks in downtrends are from the banking sector, which continues to generate credit-related concerns.

Where does this leave us? Selling appears to be drying up, but we are also not seeing buyers flock into the current market. This dynamic is also apparent in the Cumulative NYSE TICK indicator, which has been weak of late. Given this indecision, the market may just remain in its longer-term range bound mode until it receives guidance next week from the Fed meeting.