Tracking Money Flow in Materials Stocks

The last time we visited the Materials stocks within the S&P 500 Index, we found that--despite the sharp market drop--adjusted relative dollar volume flows into the sector remained positive.

The chart below updates adjusted relative flows (pink line) vs. the sector ETF Materials SPDR (XLB). What we see is that the sector has made new price highs following the market decline, but that flows among the materials stocks have been waning.

Note that the pink line is derived from cumulating the adjusted relative dollar volume flows from five stocks very highly weighted within XLB: E.I. du Pont de Nemours & Company (DD), The Dow Chemical Company (DOW), Alcoa Inc. (AA), International Paper Company (IP) and Weyerhaeuser Company (WY).

The horizontal red line represents the level of flow equivalent to the 200-day moving average. We can see that, while money flows have decelerated for the sector, they have not moved significantly below average. There is still money flowing into the Materials stocks, just not at as swift a rate as earlier.

Given the decelerating flows as prices have risen, I would not be surprised to see a modest correction in the sector. Rallies tend to be sustained when higher prices attract more, not less, capital.

Within the five stocks, DD and IP show the strongest relative flows overall; WY the weakest. All, however, are positive, indicating that money is not leaving the sector. On an adjusted basis (i.e., comparing the recent 10 days to the prior 200 sessions), DD is strongest and DOW is the only one below its average.

If the economy were headed toward recession, one would think that demand for raw materials would decline and that this would be reflected in dollar flows into the sector. Thus far, the materials sector shows no such weakness, though it may consolidate its gains from here.