Sunday, May 04, 2008

Underneath the Stock Market's Sector Rotation

The top chart updates
an earlier look at money flows into S&P 500 stocks. I've taken the ten most highly weighted issues within eight sectors (technology, energy, consumer discretionary, financial, consumer staples, materials, industrials, and health care) and summed a five-day moving average of dollar volume flows into those 80 stocks.

What we see is that, like my recent assessment of money flows into the Dow Industrials, selling pressure has been abating since January and we've been seeing modest inflows of dollars to the market since early April. These inflows have been particular modest over the past week, even as we've made fresh price highs.

I have speculated that the reason we're seeing only modest inflows of dollars to the market is that much of the rise has featured sector rotation: allocation of funds from certain sectors (that had been market winners during the decline) to others (that had been beaten down during the decline).

To examine that rotation idea, I took a look at dollars flowing into and out of sectors over the last ten trading sessions (bottom chart). Dollar volume flow is expressed in millions of dollars for each of the eight sectors mentioned above. What we see most notably is net outflows from materials, energy, and consumer staples issues and net inflows to technology and financial sectors. Indeed, essentially all of the market's net inflows can be accounted for by the rotation out of the commodity-related themes (materials, energy) and into technology.

On the surface, it looks as though there is little money flowing into or out of the S&P 500 universe. Underneath the surface, however, we're seeing potentially important signs of asset reallocation among investors.