Monday, July 25, 2005 4:19:35 AM
David's Weekly Market Chartmentary 7/24/2005 THE MONEY FLOW
The Money Flow
by David Yu
This rally that started in May was likely fueled by the shrinking float of trading shares due to corporate buybacks and explosive cash merger activity. It could also have been fueled by the foreign purchase of U.S. equities after the EU constitution referendum debacle although we won’t know that for sure until we get the June data from the Treasury Department. Incidentally, from the recent inventory buildup of existing homes for sale, it’s also possible that some of the real estate speculation money might’ve started flowing back to the equity market.
One thing we do know is that the aggregate M3 money stock (Chart 1) increased by a big chunk - $100.4 billion, from 5/23 to 6/27 (blue arrow). Prior to that M3 was actually in a slow but gradual decline for 3 weeks (red arrow). And so, from May to June, the system's loaded with liquidity but with fewer shares to buy. In addition, the Non-M2 M3 increased by $59.2 billion during this same period, and almost half of that (48.5%) went to the Institutional Money Funds.
Technically speaking, these conditions could result in a low volume environment (low overall participation) with sporadic big volume trading days. This could also distort the accuracy of some technical indicators. And, of course, the technical distortion is the mother of all divergences.
Chart 1
Let's get technical and see what the market has to say about this. Chart 2 raised the question of the divergence between the PVO and the CMF after 5/27/2005. The sharp rise of PVO (Percentage Volume Oscillator) at the end of May indicates a drastic reversal of the volume downtrend that started about a month ago in April. Meanwhile, Marc Chaikin’s Money Flow (CMF) indicator started declining by forming lower highs.
Since CMF is Accumulation/Distribution (Accum/Dist) divided by Volume, a declining CMF would also mean declining Accum/Dist. But, the Accum/Dist indicator on the same chart was actually in a steady uptrend. So, what gives?
The Accum/Dist indicator is basically a volume indicator with CLV (Closing Location Value) as its multiplier. The values of CLV were determined based on the location of the closing price relative to the price range of the recent period. High values were assigned to higher closing locations. CLV is then multiplied by the volume to form the Accum/Dist indicator. The Accum/Dist therefore could get a boost from sporadic surge of large volume.
PVO is the percentage differential between the two Exponential Moving Averages (EMA) of volume - namely 12-day and 26-day, per my specific setup. It's an indicator of the relative change in trading volume. And, so all it takes for PVO to move is the relative change, not the absolute level of volume. The fact that PVO was rising sharply doesn't mean the overall level of volume was also rising.
Chart 2
Let’s call up the volume on Chart 2 to get a visual of my technical mumbo jumbo. First thing you’d notice is the extreme low level of volume prior to PVO’s uptrend at the end of May - most notably the space between the 42-day EMA trendline and the volume bars. And, even when PVO was on the move, the volume was still staying under the 42-day EMA during that period. The 42-day EMA was used because it’s the equivalence of about two months of trading sessions. This demonstrates that even low volume could cause PVO to oscillate higher due to the relative change in the volume. Subsequently, PVO was held along the 0 line by a few sporadic surges of large volume bars. The overall volume level was still a notch below the March and April level. This irregular volume pattern also contributed to the uptrend of the Accum/Dist indicator and the divergence of the CMF.
Since CMF is the ratio of the Accum/Dist to the trading Volume, it removes the effect of the irregular volume. This makes CMF a much more accurate market strength indicator.
Chart 3
And, if we’d smooth the CMF out to 21 days (approximately 1 month of trading sessions), we can see it’s clearly trending lower and getting close to 0 line. This is a bearish sign indicating money's flowing out of the market. Of course, when this is accompanied by the PVO that’s also hovering around the 0 line, it indicates that the internal strength of this “rally” is getting stagnant.
Chart 4
The money supply has been tightening for the past 2 weeks. And, by now the rising short-term discount rates should’ve been felt by many home owners who use the adjustable rate equity line of credit to support their household expenditures. The average interest rate on these equity line of credits after the next FOMC meeting could move up to 7%. On a $100,000 line of credit, this translates to additional $3,000 annual interest expenses from just a little over a year ago.
This uptrend that's built on low volume and declining money flow doesn't appear to have the momentum to go much further.
The Money Flow
by David Yu
This rally that started in May was likely fueled by the shrinking float of trading shares due to corporate buybacks and explosive cash merger activity. It could also have been fueled by the foreign purchase of U.S. equities after the EU constitution referendum debacle although we won’t know that for sure until we get the June data from the Treasury Department. Incidentally, from the recent inventory buildup of existing homes for sale, it’s also possible that some of the real estate speculation money might’ve started flowing back to the equity market.
One thing we do know is that the aggregate M3 money stock (Chart 1) increased by a big chunk - $100.4 billion, from 5/23 to 6/27 (blue arrow). Prior to that M3 was actually in a slow but gradual decline for 3 weeks (red arrow). And so, from May to June, the system's loaded with liquidity but with fewer shares to buy. In addition, the Non-M2 M3 increased by $59.2 billion during this same period, and almost half of that (48.5%) went to the Institutional Money Funds.
Technically speaking, these conditions could result in a low volume environment (low overall participation) with sporadic big volume trading days. This could also distort the accuracy of some technical indicators. And, of course, the technical distortion is the mother of all divergences.
Chart 1
Let's get technical and see what the market has to say about this. Chart 2 raised the question of the divergence between the PVO and the CMF after 5/27/2005. The sharp rise of PVO (Percentage Volume Oscillator) at the end of May indicates a drastic reversal of the volume downtrend that started about a month ago in April. Meanwhile, Marc Chaikin’s Money Flow (CMF) indicator started declining by forming lower highs.
Since CMF is Accumulation/Distribution (Accum/Dist) divided by Volume, a declining CMF would also mean declining Accum/Dist. But, the Accum/Dist indicator on the same chart was actually in a steady uptrend. So, what gives?
The Accum/Dist indicator is basically a volume indicator with CLV (Closing Location Value) as its multiplier. The values of CLV were determined based on the location of the closing price relative to the price range of the recent period. High values were assigned to higher closing locations. CLV is then multiplied by the volume to form the Accum/Dist indicator. The Accum/Dist therefore could get a boost from sporadic surge of large volume.
PVO is the percentage differential between the two Exponential Moving Averages (EMA) of volume - namely 12-day and 26-day, per my specific setup. It's an indicator of the relative change in trading volume. And, so all it takes for PVO to move is the relative change, not the absolute level of volume. The fact that PVO was rising sharply doesn't mean the overall level of volume was also rising.
Chart 2
Let’s call up the volume on Chart 2 to get a visual of my technical mumbo jumbo. First thing you’d notice is the extreme low level of volume prior to PVO’s uptrend at the end of May - most notably the space between the 42-day EMA trendline and the volume bars. And, even when PVO was on the move, the volume was still staying under the 42-day EMA during that period. The 42-day EMA was used because it’s the equivalence of about two months of trading sessions. This demonstrates that even low volume could cause PVO to oscillate higher due to the relative change in the volume. Subsequently, PVO was held along the 0 line by a few sporadic surges of large volume bars. The overall volume level was still a notch below the March and April level. This irregular volume pattern also contributed to the uptrend of the Accum/Dist indicator and the divergence of the CMF.
Since CMF is the ratio of the Accum/Dist to the trading Volume, it removes the effect of the irregular volume. This makes CMF a much more accurate market strength indicator.
Chart 3
And, if we’d smooth the CMF out to 21 days (approximately 1 month of trading sessions), we can see it’s clearly trending lower and getting close to 0 line. This is a bearish sign indicating money's flowing out of the market. Of course, when this is accompanied by the PVO that’s also hovering around the 0 line, it indicates that the internal strength of this “rally” is getting stagnant.
Chart 4
The money supply has been tightening for the past 2 weeks. And, by now the rising short-term discount rates should’ve been felt by many home owners who use the adjustable rate equity line of credit to support their household expenditures. The average interest rate on these equity line of credits after the next FOMC meeting could move up to 7%. On a $100,000 line of credit, this translates to additional $3,000 annual interest expenses from just a little over a year ago.
This uptrend that's built on low volume and declining money flow doesn't appear to have the momentum to go much further.
David
#board-3693
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