Theme 5: Money Flows – Back In and Around, next Higher

• Posted by Greg Harmon
• on February 5th, 2011

Friday January 28, 2011 was a large down move in the market with the major indexes losing 1.75 – 2.6 %. But where did the money go? Right back in if you ask me. Earlier I said I saw five themes from the broad brush review this week. The first four, found in the individual sector charts, I described earlier (link below). The 5th theme is a simple amalgamation of them all, but speaks volumes about the potential in the total market structure right now. Let me explain.

Money Flows

The broad market indexes SPY, IWM and QQQQ all recovered from the loss that Friday by Tuesday afternoon’s close. Below is a comparison of the XLE, XLK, XLF and XLY for this period. Notice in the chart that the recovery started in the Energy sector, XLE, on Monday and carried over to the Materials, XLB, Industrials, XLI, Technology, XLK, Health Care, XLV, Financial, XLF and Utilities, XLU, sectors on Tuesday. A broad based recovery from the plunge. But that is just when things started to get interesting. From Wednesday through the rest of the week there was then a rotation within the sectors away from XLF and XLU and into the Consumer Staples, XLP and Consumer Discretionary, XLY.

Most interesting is the divergence in XLF and XLY from Wednesday onward. This is interesting because it is happening as the broad market indexes are moving higher. Money did not leave the market late in the week, but rather rotated from one sector to another.

There was not profit taking on Friday. It all stayed in. Now step back and look at what was happening in this period with asset allocation on the chart below.

This chart simply compares the price action for the SPY, the US Dollar Index and the US Treasury Bond ETF, TLT on one chart. It shows the fall for SPY on January 28 with the large black candle and then the recovery. But look what was happening to the US Dollar Index. It reversed and started a strong move higher on Wednesday, but without causing a pullback in equities. In fact they both moved higher. And what about TLT? It broke to new lows continuing its downtrend. An asset re-allocation out of Bonds and into Equities. US Equities.

Putting all this together paints a very rosy picture for the equity markets if the macro re-allocation continues, which I believe it might (Macro Market link below). Sure the indexes are at resistance levels and the TLT is on major support, but this week was different. I will be watching two things this coming week to determine how far and fast this can go. The first is whether TLT can hold support. The second is market reaction to the US Dollar Index. The rotation within the market tells me that there is no bad sector only better sectors. That is the first number in the combination to unlock the market’s potential. Lining up the other two may bring big things for stocks in the mid term.

Macro Week in Review/Preview

4 Themes from the Week

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

If you like what you see above sign up for deeper analysis and trading strategy by using the Get Premium button above. As always you can see details of individual charts and more on my StockTwits page.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus