Sunday, April 27, 2008

Money Flows Into the Materials, Industrials, and Health Care Sectors




My recent posts have examined money flows into the energy, technology, and consumer staples stocks as well as the consumer discretionary and financial sectors. (The latter post includes a detailed explanation of the money flow measure).

In this post, we take a look at five-day money flows plotted against the materials (XLB; top chart), industrials (XLI; middle chart), and health care (XLV; bottom chart) ETFs, which track the sector components of the S&P 500 large cap stock universe.

As with the earlier posts, I've taken the ten stocks most highly weighted within those ETFs to estimate sector money flows. Those stocks are as follows:

Materials: MON, DD, FCX, DOW, AA, PX, APD, NEM, NUE, X
Industrials: GE, UPS, UTX, BA, MMM, CAT, HON, EMR, DE, GD
Health Care: JNJ, PFE, MRK, ABT, WYE, MDT, LLY, GILD, AMGN, UNH

We can see from the top chart that, unlike the other sectors, funds have been consistently flowing into the materials sector, as the five-day average has spent much of its time above the zero line separating inflows from outflows. Note, however, that the most recent readings have been rather tepid. When XLB hit new price highs two weeks ago, money flows were lagging. When we had selling in the commodities last week, flows turned negative. This appears to be part of a shift out of the hot commodities stocks and into more beaten down areas, such as financials and consumer discretionaries.

Money flows for the industrials sector trace a pattern we've noted before: waning selling pressure since the January highs and net inflows since early April. As XLI has tested recent price highs this past week, money flow hit new highs before trailing off late in the week. The pattern of higher lows and higher highs in the five-day flow numbers suggests that investors have been putting money to work in this area.

Finally we have the weakest of the sectors: health care. Observe that, as the broad market has rallied of late, XLV has barely participated. Money flows have been rather consistently negative as well. We saw some inflows early this past week, but those have hardly been impressive. It is quite likely that investors, noting the health care reform ideas advanced by the Presidential candidates, are not aggressively dedicating capital to this sector.

Once again we can see how the flow of funds in and out of sectors captures important market themes. This is a promising measure of sentiment that I'll be covering in greater detail in the future.
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2 comments:

Marc said...

Hi Brett,

Your money flow/TICK charts and comments are invaluable. Thank you.

Have you ever looked at periods of tepid money flow after a significant correction? In other words, I wonder if there's a lot of money just sitting on the sidelines waiting to jump in at this time.

Tepid money flow at a market top might portend quite a different picture than tepid money flow at a bottom.

Just thinking aloud,
Marc

Brett Steenbarger, Ph.D. said...

Hi Marc,

I suspect that the tepid money flow reflects that much of recent market action consists of sector rotation, rather than lots of new money being put to work.

Brett