Could you explain the difference between money flow and buying? (September 20, 2000)
Money flow is a way of looking at whether there is, overall, money going into or out of a stock; that is, whether the money is coming in on the buy side. A way to look at it is to see how we calculate it--we look at many measures of money flow to get a flavor of what we feel is moving into the stock. We look at Bloomberg money flow indicators, IBD accumulation tables, charting programs, block trades and traditional 'money flow' formula calculations. We also look at Trim Tabs, a company keeps track of flows into the various types of stock funds as well as money market funds. We compile all of the information and come up with our view on money flowing into a particular stock
With respect to timeliness, money flow is not necessarily an instantaneous stock mover. For example, when institutions want a stock, they cannot just go buy it. Price would fly on the buys and then fall. They accumulate over months. We can see money flowing into a stock for weeks (accumulation) before we see results. We love to see it, however. If we see a combination of block trades, money coming into a stock, and know there is other money on the sidelines in the market, that is a huge plus.
However, just because we see an upstart in money flow, we do not get too excited. If it concurs with other solid indicators, we do get excited. It can indicate interest when nothing else is going on with a stock. It can put it over the top if everything is in gear and we see a surge in money flow. Thus, the day by day inflow of money usually does not move a stock immediately. It is one of the indicators we like to see improving or strong, but it is not THE indicator.
Buying is related to money flow (indeed, as discussed above, it is one of the factors we look at to determine money flow), but is different in that is a pure measure of institutional interest. Institutions include mutual funds, insurance companies and the like. To get large moves in stock prices on stocks other than those with very small floats, you need to have institutions buying the stock. We look at several factors, but it is not an exact science. We look at block trades, publications detailing what mutual fund managers are buying and selling, what stocks are being accumulated or sold, and the price/volume action on individual stocks.
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