Money Flows Into the Market: 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 A negative figure suggests capital being withdrawn from stocks.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 (click chart to enlarge), 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.

Comments

[karchad]

My optimistic take is that when selling dries up, we're at a bottom, even above it. It will take awhile for buying to pick up, yes, but to me, downside risk is limited, the greater risk is in missing that sudden move up. I'm in at this point. If the awful daily news hasn't created more selling, then there's no more selling to be had. I can wait, like in 2002, i went in big in August, the low was hit in october, but i had to wait till the next year for the gains. That's okay. I can look beyond CNN's daily disaster stories for my investment strategy. I like this article.

[iThinkBig]

The global investor is investing in what is considered a safehaven, essential commodities. In past domestic or global downturns, investors turned to bonds and stocks and went long. The health of the U.S. financial system is very much still in question. Main St. is cutting spending and Main St. is 70% of the GDP. Main St. is now dragging down Wall St., it is inevitable. The entire easy credit economy created a ton of over expansion and our service economy (80%) is not something the U.S. or globe really needs at this time. I expect GDP to contract to -20 within three to four years with the U.S. energy policy (or lack thereof) being the wild card. So for now, I will take the limited recovery from stimulus and sell my consumer healthcare media business while the bulls are fooled into thinking all is well again.

[John Pseudonym]

This is a sucker lull.

The past is not the present. 2008 is not 2002 in any respect.

I won't list all of the serious problems with our economy as you should know them by now. But taken together they spell no growth and the potential for serious negative growth.

That's hardly a "bottom".

I predict you'll be handed your head on a paper plate.

[globalmacro]

Mr. "Pseudonym",

You're absolutist tone clearly labels you as the village idiot. Congrats.

GM

[User 143167]

The only reason you should be optimistic about this market is that it is too big to fail for the US. Imagine the HUGE unfunded pension liabilities on all companies' balance sheet if the market tanked another 20% from here. Not like anytime in the history, this country is now built up by financial assets and credits ONLY after most manufacturing has been shipped out.
Wise up, "The problem of the big banks is the problem of the whole country now". No way can we ever get rid of this brain cancer without paralysing this country, so the Fed's only viable way is to dilute this problem by inflation. In that scenario, an equity market tumble will fail the Fed's effort, that is why the government, the talking heads on major media, the big fund industry gurus, will do all their best to save it, no matter how overvalued it may be. Have to get an equity bubble to counter the effects of bursting housing bubble.

[De Val Yood Buck]

Brett -- The dollar continues to lose value. What would your chart look like if you made it in terms of (a) Euros, (b) gold or (c) oil?

[John Pseudonym]

GM,

This village idiot will have his fortune in the bank when this blows over.

There are too many dark clouds to justify anything but short term buying and selling for traders.

The "buy and hold" strategy of the masses is dangerous at this time.

With all of the serious (known problems) in the world economies, why in the world would you want to be standing on the tracks as the light approaches?

I can't predict the future, but the past and the present have set up a risky situation; best to get out the way and until you see what the light is exactly.

JM

[steve west]

John go take your gun and your survival gear and hunker back down in your bunker where you belong. leave the real investing to those of us who know what we are doing
In fact keep your money under the mattress - the market is headed higher and that is just the way of the world

[karchad]

Hey John Pseudonym, as the market slowly drifts up, it will be up 100% and you'll still be yelling "bear trap". I've heard from the likes of you for 40 years now, and have made tons of money off of people like you. Keep listing what's wrong with the economy, while I make money, buying at low points of the market, when people like you are yelling "Disaster"..... By the way, homebuilders ITB is up from 13 to almost 21, i'm in at 17. An amateur like is probably scratching his hear, wondering how that can be, "the news is so bad". Here's a hint: you make money buying on bad news, not good news. Good luck losing your money

[John Pseudonym]

I'm not saying that between now and next week the DJIA will be at zero.

I'm saying the risk/reward ratio is not favorable to a "buy and hold" strategy.

This market is for the nimble; not your typical mutual fund investor.

Heading for all time highs while the economy sinks is a sure sign of mania. And the average guy always takes it in the shorts when the mania ends.

[karchad]

I'm grateful to the people who defended my comments, but i'm a little upset at it! Not personally, but I like to see 100 people attacking my optimism. Anyway, there will also be some John Pseudonyms, so don't be so hard on him. He helps the rest us profit in the equity's market! Without him, i wouldnt be retired!

[karchad]

John, you're right for individual stocks, i dont advocate buy-and-hold for that. But for etfs/index funds, it's the best we can do. nobody can time the market. Not you, not me, not Buffet,Rogers, etc. The best we can do, is buy at low prices. Period. And you and i can tell what is a relatively low price. when the market drops 20%, it's time to buy. sure, you may not make money next week, next month. but long term, you return will exceed others' and maybe even exceed the indices. When the market is up for 5 years in a row, or bubbles up 80% in a year, it's time to lighten up. That's the best I can do to get decent returns. I can't time. And i dont believe ANYONE can. Not even a computer.

[John Pseudonym]

"Here's a hint: you make money buying on bad news, not good news. Good luck losing your money"

Here's another: Bad news can get worse...

---------------------

From a technical standpoint, I see us in the recovery phase of the first Elliot wave down.

The 3rd wave down is a high probability.

It's not time to bury your head in the sand, it's just time to be cautious and ready to move out of the way if/when that tsunami wave hits.

[bearfund]

karchad, I too like to buy assets on the cheap. It's even a point of pride not to overpay. The problem is, stocks are not cheap today. While there are exceptions (and my, the effort I invest in looking for them), most companies and indeed entire sectors have wildly unrealistic earnings expectations for the next couple of years. The harsh reality is that a stock trading today at 16x trailing earnings and an "estimated" (random number pulled out of analyst's ass) 14x forward earnings is more probably trading at 20x forward earnings with additional downside risk. Companies that sell to individuals (called "consumers" by the media) are going to find - and are finding already - that unless their products are essential to life, they're going to have a lot fewer customers. The reason for this is straightforward: many American individuals have negative net worth and most of those who do not have substantially all their assets in retirement accounts. Under those conditions, spending tends to equal credit creation. No credit, no spending. America is simply tapped out at every level, from the individual to the US Treasury. If you want to make money in this market, you have to look abroad or focus on commodities. Maybe there are a few US companies sufficiently undervalued to be worth the risk, but there are very few I even give a second look and I haven't bought one in the past 2 years.

You're absolutely right that when it seems like things can't get any worse it's historically a good time to buy. I'm simply not convinced that the market has reached that point psychologically. People are thinking credit crunch followed by brief, mild recession. The reality is very different. This recession may or may not be mild, but it will not be brief; if it is, it will turn out to be followed by another in short order. The milder the recession, the longer it will last, the more inflation will accompany it, and the better commodities and foreign assets will look. At some level, the facade of value creation propped up in front of credit creation simply becomes unbelievable and something has to give. It's either a major recession or dramatic inflation and devaluation or both. Once all that has worked itself out (and everyone thinks, as they did in 1980, that things simply couldn't get any worse), stocks will be a great buy -if- America learns the right lessons from it. I figure that to be several years off yet and it depends on that most unpredictable of factors, politics. The early 80s had Volcker and Reagan to shake the country out of its funk. Things are worse this time, no matter what sunshine is being blown up your ass by bulls, and leadership is in shorter supply than ever. You're right on principle but terribly, devastatingly wrong on timing. Average down, I guess. You'll eventually make money, just a lot less than you could have.

[ICouldBeWrong]

My concern is that we are going to see a classic sell in May and go away scenario.

Here's how I think it might play out. Crude and natural gas make one last surge upwards, crude tops at around US$130 sometime in early May. Then we see selling across the board in commodities, and also in commodity stocks. This pulls down the major US averages which have been trading sideways, and they join the shanghai composite and nikkei, trending down. S&P can't close above 1400 for more than a few days.

At the same time the Yen begins to gain strengthen. The Yen has been weakening recently and has almost pulled back to support (~50dma) levels. Once it reaches support it will resume the bull wave up that began back in mid 2007 when equities were topping. A pattern emerges of days where the Yen (and maybe Renminbi) strengthen and commodities and equities sell off. The Dow Jones transports having formed a clear heads and shoulders top break 200dma support and enter free fall. The Yen bull market becomes the dominate theme as all eyes turn again to the Yen and the unwinding of the carry trade.

I'm still trying to work out bonds.

Ultimately crude (WTIC) reaches a nadir between USD80-90 and a bottom in equities/commodities forms.

OTOH if the S&P closes above 1400 for a couple of days within the next few weeks I'm on wrong and I'll cover my shorts.

[fxtrader07]

as i have pointed out elsewhere this will neither be a straigt downward crashing market nor a new bull run. some sectors have already had a devastating bearmarket and a sharp recovery (e.g. homebuilders). others had the first leg down (retailers), some are in turbo bull mode (enbergy) and some have been holding up but will likely enter into cyclical declines as well (tech, "growth"-sec... what gives? the averages won't do much overall for probably years to come. the s&p for instance might just swing around between 1500 and 900. a wide range, granted, but as things stand you won't make much money with your average etf at all.
p/e compression has been underway and will continue. the consumer spending will be anemic and shrinking for the coming 2-3 years as the households work themselves slowly out of their overextended debt levels. of course, you probably will have made money 10 years from now if you just hold but returns might be very small overall and inbetween there could be gut-wrenching declines.
focus on proven, time tested businesses which cheap valuation and robust cash flow and good dividends and keep part of the holding in cash and some in physical gold and commodity stocks (dont chase either one). some financial stocks look cheap here, but as i am unable to assess the risksn for any of the banks (anything can still be hidden in the balance sheets) i won't touch them as i cannot properly manage the risk forn these stocks

[peterthepainter]

this is a very interesting debate!
I love to read
benbittrolff.blogspot..../
www.financialarmageddo.../
globaleconomicanalysis.../

so seeking alpha is interesting because it is much more bullish and gives another view.

my own view is that this is a big deal and that it is too soon to believe that its all over, I read articles like this one because I may be wrong and I am hedged to some extent. i believe that the market is being propped up like user 1437 does.
Japan provides an illustration of what can happen - top around 40,000 drop to around 28,000 (looks cheap?) drop to around 17,000 (cheaper?) then down to 12,000 then up and down between 12,000 - 20,000 then 8,000 before back to 12,000 then 17-18000 then 12,000 for 18 years!

you probably think that it couldn't happen here.
I wouldn't be so rude to those who disagree with me - I may be wrong!

[cashew]

The problems are so big that they can't let it fail!!!!!! The market has been hyped in the late 90's and then real estate was blown up due to the stock market crash in 2000. The market will move higher on green technology and a slow restoration of housing. However, housing is doomed to go nowhere for years and the stock market will be the only game in town. Even with inflation interests rate next year may make a modest climb . I agree the fundamentals of the economy suck but that doesn't mean the market won't move a lot higher by next year !

[Pauly B]

Housing is in a upswing, the American Consumer has recovered, no recession, no stagflation, 90 % of companies are giving positive forward guidance and are profitable, the financials have rebounded, Man this economy is on fire. Gotta love the bulls right now. Just saying and believing this makes one feel so good.

For me I think I will stay in my bunker a little bit longer and keep my puts and short positions on just in case.

[curious cat]

i don't know, but my wife keeps buying things and planning another vacation. does that mean anything? yup, some people do not read the business news. they do not care where the dow is and just keep doing what they've been trained to do. they consume. thank god for superman, i mean market, and the american way.

[CarlosSlim]

I would like to see analysis on the captial inflows into Ponzi schemes.

Seriously, some people think the market's rise is due to pensions/mutual funds/IRAs/401Ks funded by...wait for it...

....BABY BOOMERS!!!!

Who are now beginning to retire.

When the BABY BOOMERS retire, can anyone guess what will happen?

Anyone? Anyone?

Bueller?

[John Pseudonym]

"When the BABY BOOMERS retire, can anyone guess what will happen?

Anyone? Anyone?

Bueller?"

-----------

The first ones out will be rich. The rest will depend on social security...

The real market crash will come when the average boomer with his fortune in a 401k plan gets scared. I don't see that yet, so for now we plod on trying to increase/keep our wealth.

Most 401k'ers can only pull out once a year...So there's a January in future that's going to be a bad one...

[Paulo]

The Baby Boom herd may not stampede for the exits with their equities all at the same time and with the same type of equities. As people retire, though they might lower the proportion of equities in their portfolios, they may also move away from Yahoo and China Mobile and more towards Procter & Gamble and Johnson & Johnson (more established holdings with good dividends). Those who need cash flow will shift both to dividend stocks and a greater variety of fixed income investments.
I remember reading a couple of decades ago that in the aging societies of the then industrialized world (how things change!) that there would be a transfer of wealth to other parts of the world in search of higher yield. This has already happened and is continuing.
Also, the demographics and economic growth patterns in global perspective do not presage a collapse of world stock markets as American (and Australian and Canadian) Baby Boomers retire and sell off their equities en masse in a desperate lunge for cash.

[Techzone12]

I tried to time the market before and failed, not badly though. I withdrew from the stock market in the middle of 2001. The problem is that I didn't get back until early 2006. I then got out in November of last year. When I do the math I can see some gains with the moves I made, but nothing huge. I have to say I am nervous about today's market. I am getting back in with just 20% of the cash. The risk is too high, but so is the reward! The technicals indicate (although could be artificial) that the market is recovering, but the overall economy suggests otherwise. There are just too many unknowns.
I think (and obviously I could be wrong), that there will be some significant money to be made in the very short term (one month form now). But long term, the picture is not so rosy! So I will be in and out, trying to time the market, again!!. :)

[globalmacro]

You make it sound like some sort of childish game, techzone. Cute.

[cromag]

A lot of egos in this thread.

Anyway, the $150B stimulus package just might inflate another GDP bubble of illusionary consumption spending. We the people elect a President who hands our money back to us in a stimulus package to re-inflate and make us think we are still 'collectively' rich. The nouveau riche a have exhausted their equity lines and it's time for the pain.

This is far from over.

[John Pseudonym]

I'm in Des Moines Iowa. Our housing bubble was minor compared to the rest of country and subprime loans are not a major issue here.

Today the largest home builder in the state closed it's doors!

The finance industry is huge in this town; they are shutting down entire buildings that they built just a few years back.

They are refusing to loan money to just about everyone.

The vacancy rate in strip malls is over 20%.

Gas is $3.53 a gallon.

My heating bill last month was almost $400 because it's been so dang cold!

My income is not going up anywhere near as fast as my costs and I'm not alone.