Friday, May 23, 2008

Stocks Having Difficulty Going With the Flow

Recall that money flow is a measure of the dollar volume either entering a stock (buying interest) or leaving a stock (selling interest). If a trade occurs on an uptick, the volume of that trade times the transacted price is added to a cumulative total. If a trade occurs on a downtick, the volume of the trade times the transacted price is deducted from the total. The cumulative total for the day is that stock's money flow. In the chart above, I've calculated the daily money flow for all 30 Dow Jones Industrial stocks, added the daily totals to obtain money flows for the index as a whole, and plotted the four-day moving average (pink line) versus the Dow ETF (DIA; blue line).

When the pink line is above zero, we're seeing net dollar inflows into Dow stocks. When we're below zero, there are net dollar outflows.

What we can see is that we have seen less outflow of money since the January bottom--a divergence I noted at the March lows--but that since March we have not sustained dollar volume inflows. After money flows turned modestly positive in April, we've seen a resumption of dollar outflows in May. Indeed, we've seen net dollar outflows from the Dow stocks on 13 of the last 15 trading sessions.

Interestingly, 19 of the 30 Dow issues are showing net outflows for the last ten trading sessions; 11 are showing inflows despite recent market weakness. As my earlier post indicated, we're seeing outflows from financial stocks and industrials; materials and energy companies are holding up better.

This suggests to me that, once again, even when the market has been rising, we're seeing more of a shifting of funds from sector to sector, rather than influxes of new funds into stocks. If this continues, it may well keep a lid on market gains.


Weakness in Financial Sector