Tuesday, February 27, 2007

Which Dow Stocks Are Hot, Which Are Not, and What It Might Mean

In my recent post and on my Trader Performance page, I introduced a measure that I called Relative Dollar Volume Flow. This indicator is designed to assess the sentiment of large traders in individual stocks by multiplying the price of each trade by its volume and either adding that amount to a cumulative total (if the trade occurs on an uptick) or subtracting it (if it occurs on a downtick). The daily total is then divided by the volume for that day to obtain a relative sense of the proportion of volume that was occurring at the market bid (on downticks) vs. the market offer (on upticks). If the Relative Dollar Volume Flow is positive, we have net dollars flowing into the stock for the day. If the Relative Dollar Volume Flow is negative, we have net dollars flowing out of the stock for that day.

As a whole, dollars have been flowing into the Dow. Since 2004 (N = 787 trading days), we have only had 57 occasions in which net money flowed out of the Dow 30 stocks as a whole. In other words, when we compute the Relative Dollar Volume Flow for each of the Dow 30 issues and sum these to obtain a total Flow for the Dow, rarely have we seen net selling of the Dow. More on that later.

This strength of money flow, however, belies large differences among the individual Dow components. Over the past 25 trading sessions, the Dow as a whole has been modestly higher. Let's look, though, at how many of those trading sessions saw net dollar inflows for each of the Dow issues:

AA - 22
AIG - 19
AXP - 17
BA - 24
C - 20
CAT - 24
DD - 25
DIS - 13
GE - 18
GM - 25
HD - 17
HON - 22
HPQ - 21
IBM - 24
INTC - 16
JNJ - 13
JPM - 18
KO - 11
MCD - 21
MMM - 19
MO - 23
MRK - 22
MSFT - 7
PFE - 8
PG - 23
T - 22
UTX - 22
VZ - 22
WMT - 14
XOM - 21

What we can see is consistent inflows into such issues as BA, CAT, DD, GM, and IBM and more consistent outflows from MSFT, PFE, KO, DIS, JNJ, and WMT. Overall, 17 of the Dow 30 have seen net inflows for 20 or more days in the last 25 trading sessions. That is not exactly a picture of broad weakness. Rather, it suggests that institutions have been moving money away from selected issues (many of which might be characterized as blue chip growth rather than value). I find it informative to go to a site such as Instant Bull and examine the news and the message board buzz about these stocks, as a way of seeing what the market is concerned about. In the case of the stocks with the most consistent outflows, MSFT and PFE, there are clear concerns surrounding Vista and health care costs, respectively. The Dollar Volume Flow figures suggest that money managers are truly acting upon those concerns.

Overall, since 2004, we have had corrections in the market, generally in the vicinity of 5-7%. On those occasions, we've seen a reduction of net inflows into the Dow 30 stocks, but no systematic liquidation. I went back to the 57 trading days in which we had net outflows from the Dow 30 as a whole. Three days later, the Dow (DIA) was up by an average of .35% (35 up, 22 down). That compares to the average three-day gain in DIA for the remainder of the sample of .06% (396 up, 334 down). In other words, investors have tended to use outflows from the Dow as short-term buying opportunities.

At some point we will have a bear market. Indeed, as I write, the preopening stock index futures are trading much lower. What will tell us whether such a move is a normal correction vs. a full-fledged start to a bear market? One thing we might look for is a broadening of dollar outflows from the Dow issues. As long as outflows are selective and money is moving into the Dow stocks as a whole, market declines are likely to be contained. That's been the pattern since 2004. To this point, I've seen no change to the pattern in the recent market data. The Dow has been down for three consecutive sessions, but only 9 of the Dow 30 have seen net outflows over this period.


hyobin lifestyle said...

wow...내가 외국인이라 , 무슨말인지 다 알아들을 수는 없지만, 어쨌든 멋진말인거같아.

Brett Steenbarger, Ph.D. said...

너를 감사하십시요. 이것이 끝 이다 것 을 나는 생각하지 않는다.

Thank you. I don't think this is the end [of the bull market].

Brett (whose ability to translate Korean is very limited!)

Pradeep Bonde said...

The Worden Moneystream and BOP indicators try to do a similar thing.

Brett Steenbarger, Ph.D. said...

Yes, Pradeep, thanks for calling attention to the Worden research. I believe Trim Tabs and the Birinyi organization might look at similar data as well.


b hong said...

Dr Brett
I CAN'T WAIT to see what your analysis will be this evening! Let me guess: Something on the order of "strength begets strength and weakness begets weakness". The only question is: will this be the 10 to 20% correction that the bears had been predicting/pleading for; or something more ominous. As I said, I just can't wait.

Brett Steenbarger, Ph.D. said...

Hi Bruce,

I'll be posting an analysis before the open on Wednesday that does support the weakness following weakness idea. So far this reminds me of the break in October, 1997. Very sharp, but also relatively short, and it led to later gains before we hit greater problems in 1998.