Over the past 20 years or so Ive searched for a reliable
method of research either technical or fundamental
that would increase the probability of discovering
profitable investments or, equally as important that
would accurately identify market trends.
None of the major brokerage firms or investment letters
seemed capable of generating the reliable fundamental
research that would meet my expectations. And, I have
always been befuddled by technical research Bollinger
Bands, MACD, Parabolic SAR, etc.
Within the past 18 months or so, Ive come across a source
of data that has piqued my interest. More important, its
something that I can understand Money Flow. It strikes
me as being compellingly logical that the only force that
moves stocks higher is the aggressiveness of buyers.
Conversely, the only force that moves stocks lower is the
aggressiveness of sellers. And, thats what Money Flow
measures the aggressiveness of buyers (buying stocks on
upticks) and the aggressiveness of sellers (selling stocks
on downticks).
Heres the logic behind my premise. If investors are
buying stocks on upticks, isnt it reasonable to assume
that they believe prices are headed higher? If they
believed that prices were headed lower, wouldnt they just
sit back and accumulate stock on downticks? Conversely,
if sellers are selling stocks on downticks, isnt it
reasonable to assume that they believe prices are headed
lower? If they believed that prices were headed higher,
wouldnt they just sit back and sell into a rising market
on upticks?
Unfortunately, the daily data that I use is available only
for the 100 stocks with the highest dollar volume of
upticks and a separate list for the 100 stocks with the
highest dollar volume of downticks. I say unfortunately
since a list of 100 stocks is obviously very limiting.
However, since most of these trades are being done by
institutions and since institutions account for roughly
75% of all daily trades this data offers a pretty good
proxy for the market.
Anyhow, I update both the Gainers and Losers charts daily. I compute a 30-day moving average of the
total dollar value (millions) of money going into the 100
stocks with the highest dollar volume of upticks and the
100 stocks with the highest dollar volume of downticks. This data is then reduced to an easy to understand ratio.
When the uptick value is higher than the downtick value,
buyers are being more aggressive than sellers, indicating
that money is flowing into the market (accumulation),
which in turn suggests that the market is trending
higher. When the downtick value is greater than the
uptick value, sellers are being more aggressive than
buyers, indicating that money is flowing out of the market
(distribution), which in turn suggests that the market is
trending lower.
I also record the number of stocks that have
appeared for 7 days out of the most recent 10-days on
either list. Although it's impractical to identify all of those stocks, I will comment from time to time on stocks
that have unusual money flow characteristics.
If any of you have constructive thoughts that might
contribute to this approach, wed all like to read about
them. |
