You've Got to Go With the (Money) Flow!

"This planet has a problem, which was this: Most of the people living on it are unhappy for pretty much of the time. Many solutions have been suggested for this problem, but most of these are largely concerned with the movements of small green pieces of paper, which is odd because on the whole it isn’t the small green pieces of paper that are unhappy." ~ Douglas Adams

We have been talking about the money flow in comments for the past couple of weeks as there are patterns there that disturb me, and Dr. Brett over at Trader Feed is also concerned about what he sees in this very leaky market.

Why are we concerned about money flow? As you can see from this chart, money flow is VERY predictive of Dow behavior over the long term and formed an excellent early warning indicator of a problem as it fell off steadily in February:

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We discussed in comments what stocks would be good to short this month and I suggested we look for groups that fell the hardest around 2/27 and bounced back the most last week and, surprise, surprise – it’s the oil patch!

The Oil and Gas sector, as tracked by the WSJ did not have the greatest outflows during the drop (1.9% vs. 3.9% for Financials, 3% for Tech and 2.2% for the DJIA) but it had inflow gains last week (2.5%) that doubled every sector other than Basic Materials, which saw positive inflows gain 2.25% against a .87 gain for the month.

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Even more interesting, on Friday there was a sudden .18% drop in flow to Oil and Gas, despite a 1.17 up/down ratio in the sector, indicating the money is being spread rather thin, likely by trading programs set to accumulate “bargains.”

A real optimist would hit a button that says “BUYBUYBUY” and I would need a button too, if I made 100% positive and 100% negative statements so often that my voice would wear out… I’ve been accused of being a perma-bull in the bull market and a perma-bear in the bear market and wishy-washy when the market is flat-lining, but I prefer to think of it as just good market timing!

Dow outflow leaders since 2/1 have been The Walt Disney Company (DIS), Johnson & Johnson (JNJ), The Coca-Cola Company (KO), Microsoft (MSFT), Pfizer Inc. (PFE) and Wal-Mart Stores, Inc. (WMT) while Dow stocks that have had inflows through thick and thin were Alcoa (AA), The Boeing Company (BA), Caterpillar (CAT), E.I. du Pont de Nemours & Company (DD), General Motors Corp. (GM) (???), Honeywell International Inc. (HON), International Business Machines Corp. (IBM), and Altria (MO), Merck & Co., Inc. (MRK), The Procter & Gamble Company (PG), AT&T Inc. (T), United Technologies Corporation (UTX) and Verizon Communications (VZ). The worst performers, Microsoft (MSFT) and Pfizer Inc. (PFE) had just seven and eight up days respectively, while our leaders were all 22 or better out of 25 days tracked by Dr. Brett.

So let’s be careful in this "rebound" and make sure the real money is coming back into the markets, rather than sneaking out the back door. We’ll look for this week’s inflows to match last week’s, which should be a sign that it’s really safe to jump back in the water. But before I start to declare our market glass half-full, I want to hit our 33% levels in ALL indices and see a lot more of a rebound from our outflow leaders!