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October 11, 2009
Edited: October 11, 2009
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My motto in those days was "An Ad Rep Works From Sun to Sun, But an Editor's Work Is Never Done." Still, I always managed to find an hour -- or three -- every season to visit the beach and simply watch the ceaseless Atlantic Ocean as it first rolled in and then rolled out.
Accordingly, I guess it is natural I see waves almost everywhere I look, even today. Waves of people on Fifth Avenue. Waves of pigeons in Central Park. And waves of money in the financial markets.
As mentioned elsewhere at P&P, the proprietary Mighty MTK Equity-Market Money-Flow Indicator (MMEMMFI) is among the primary metrics employed to monitor the daily waves of cash moving in and out the stock market as measured here at the home office of the completely fictional Druids Investment Group (Can You DIG It?).
The MMEMMFI has two components: a Daily Index and a Trend Index. Both in theory and in practice, the Daily Index's values range between -1.00 and 1.00, while the Trend Index's values range from slightly higher than -1.00 to slightly lower than 1.00 (i.e., the only way the latter's values can reach either -1.00 or 1.00 is by rounding). In each index, the highest value is associated with accumulation, and the lowest value is associated with distribution.
Based on end-of-day data collected on the 195 trading days between Jan 2 and Oct 9 of this year, inclusive, the three below-presented charts show the following relationships:
-- Figure 1: Between the MMEMMFI's Daily Index and its Trend Index.
-- Figure 2: Between the MMEMMFI's Daily Index and the Standard & Poor's (S&P) 500 (SPX).
-- Figure 3: Between the MMEMMFI's Trend Index and the S&P 500.
Figure 1
Source: Druids Investment Group (DIG)
Figure 2
Source: DIG Chart Based on DIG and Yahoo! Finance Data
Figure 3
Source: DIG Chart Based on DIG and Yahoo! Finance Data
In my current interpretation of the MMEMMFI as presented in these charts as well as in their underlying data sets:
-- The last significant peak in money flow was on Sep 17 (according to both the Daily Index and the Trend Index).
-- The last significant trough in money flow was on either Oct 2 (per the Daily Index) or Oct 5 (per the Trend Index).
-- It appears more likely than not the current trendency in money flow may carry SPX higher over the next trading week, especially as it is an options-expiration week. Of course, other indicators suggest the index may be overbought in the short term.
Although the monitoring of money flow has been part and parcel of the MTK Daily Market Seismometer for quite a while, I was happy a few months ago when I came across an old Credit Suisse First Boston (CSFB) Equity Research Quantitative Analysis report comparing the effectiveness of eight indicators widely employed in attempts to identify overbought and oversold equities. According to CSFB:
-- The four most successful of these indicators were (from best to worst) Bollinger bands, five-day money flow, the commodity channel index, and the nine-day relative strength index.
-- The four least successful of these indicators were (from worst to best) Fibonacci range score, moving average convergence/divergence, 14-day stochastic, and Fibonacci score.
With this in mind, I believe the following chart of SPX and the five-day Chaikin money-flow indicator from Jan 2 to Oct 9 of this year, inclusive, may be helpful to those without access to the MMEMMFI: http://tinyurl.com/yfhtn2p
Related Blog Post
OpEx Week and SPX: Aug 2007-Jul 2009 (http://tinyurl.com/yfygfq6)
