Tracking the Flow for Materials, Industrials, and Consumer Discretionary and Staples

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Includes: XLB, XLI, XLP, XLY
by: Brett Steenbarger

In this post, I ask the question, "Where's the Flow? [WTF]" for four major sectors within the S&P 500 large cap universe (with four more to follow later): Materials, Industrials, Consumer Discretionary and Consumer Staples.

Above I chart cumulative daily money flows (raw values; top chart) and a five-day moving average of money flow for five highly weighted stocks within the S&P 500 Materials sector. The money flow lines are plotted against the Materials ETF (NYSEARCA:XLB). The stocks included in the calculations are DuPont (DD), Dow Chemical (DOW), Alcoa (NYSE:AA), International Paper (NYSE:IP), and Weyerhaeuser (NYSE:WY). Note that five-day flows have oscillated around the zero level and tracked price reasonably well since August, 2007. We're neither seeing meaningful deterioration in money flows in this sector, nor seeing major accumulation of shares. Interestingly, we had a selloff in Materials stocks on Friday with the broad decline among commodities, but money flows were not negative on the day. This appears to be part of a broader pattern in which we're seeing higher lows in the cumulative money flow line (top chart). This may be suggesting a drying up of selling pressure within the sector.

In general, we've seen the best short-term buying opportunities in this sector when five-day flows have been negative. We are modestly positive at present. A break of the cumulative flow line above zero would suggest increased accumulation of these shares.

Above we see the cumulative raw money flows (top chart) and five-day average flows (bottom chart) for five highly weighted industrial stocks. These are plotted against the Industrials sector ETF (NYSEARCA:XLI). The five stocks included in the calculations are General Electric (NYSE:GE), United Parcel (NYSE:UPS), Boeing (NYSE:BA), United Technologies (NYSE:UTX), and 3M (NYSE:MMM).

Note that the flow patterns for the Industrials sector look very different from those seen among the Materials stocks. Cumulative flows have been in a steady downtrend (Friday's strength notwithstanding), indicating a flight of funds from these issues.

Five day flows are currently positive--something we haven't seen often since August, 2007--and the sector index has so far held above its price lows from January. We'll need to see sustained buying (positive flow figures), however, to conclude that the recent bounce is anything more than short covering.

Now I take a look at five highly weighted Consumer Discretionary stocks and plot their cumulative money flow (top chart) and five-day average flows (bottom chart) against the Consumer Discretionary ETF (NYSEARCA:XLY).

Note that, like the Industrials and Materials sectors, the Consumer Discretionary stocks have thus far held above their January lows. Observe also that cumulative money flows have held up quite well during the period of recent market (and sector) weakness, as we remain well off the money flow lows from late 2007.

Five-day flows have turned negative for the sector, but are nowhere near as intense in selling pressure as those from late 2007. While we have yet to see sustained buying interest among these shares, there does appear to be a drying up of selling pressure thus far.

Now onto a look at five highly weighted Consumer Staples stocks, plotting their cumulative money flows (top chart) and five-day average flows (bottom chart) against the Consumer Staples ETF (NYSEARCA:XLP). The five companies whose flows I've aggregated are Procter & Gamble (NYSE:PG), Altria (NYSE:MO), Wal-Mart (NYSE:WMT), Coca-Cola (NYSE:KO), and Walgreen (WAG).

A pattern that we saw with the three earlier sectors is also apparent here: during recent market weakness, XLP failed to break below its January price lows. Note, however, that during the recent weakness, cumulative money flows for the Consumer Staples shares have been in a steady downtrend, testing bear lows. This is quite different from the flow patterns seen among the Materials and Consumer Discretionary shares, which showed reduced selling pressure during recent market declines.

Five-day flows remain weak despite a recent bounce in the sector. Clearly, despite the ability to hold the January lows, we're not seeing sustained buying interest among the Staples.