For the past year we have been displaying and discussing the importance of ETF asset flows as one of the only metrics we know of that often actually leads price direction. Since these flows, as they pertain to the SPDR Dow Jones Industrial Average ETF (DIA), have recently been a textbook example of this, we decided to present it today as a teaching opportunity.
Despite the fact that we have been overall bullish on the US stock market for most of this year, back in mid July we began suggesting that subscribers not chase the new highs in the S&P 500 (not put new money to work there) because it appeared that near term downside risk exceeded upside potential. We suggested that subscribers consider waiting for what we believed was an emerging 4% to 7% correction lower, and then buy.
The S&P 500 managed to rise by an additional 1% between mid July and mid August before collapsing by 5% into late last week’s (November 3rd and 4th) lows.
The lower panel of the chart below plots the total net assets invested in the SPDR Dow Jones Industrial Average ETF (DIA) daily since May along with their 21 day moving average, the latter which we use to define a monthly trend of expansion or contraction. A corresponding daily chart of DIA is plotted in the upper panel. These daily asset flows are one of a handful of key market metrics that we use to help identify buying opportunities within what we believe is an overall bullish market environment.
Beginning on with our October 18th report, entitled Watch ETFs Asset Flows For Clues On Q4 Market Direction (access requires subscription), and frequently via reports and personal emails to clients since then, we have been pointing out that the important $11.5 billion threshold in the total net assets invested in DIA was being tested. We stated that if the 2016 advance in the US stock market was still healthy and valid, one of the first places we were likely to see it was in new inflows of assets coming in from the $11.5 billion area to drive DIA – and the Dow Jones Industrial Average that it represents – higher.
The green highlights in the chart show that new money came into DIA immediately on October 18th, the day of our report, and then over the next several days that followed. The green highlights also show that previous tests of the $11.5 billion level coincided with near term bottom in DIA on May 19th, June 27th and September 14th.
Most recently, the rightmost green highlights on the chart show that these assets once again tested the $11.5 billion threshold on November 4th — 2 days before the election — and immediately spiked higher on November 7th. We displayed and discussed this in our Tuesday morning (election day) report entitled ETF Asset Flows: Market Positioning For More Post-Election Strength, stating that this indicated the market was betting the US stock market would resume its 2016 advance once the election was over.
Although there were some nasty bumps along the way, the market was once again correct as the Dow Industrials overcame a huge election night decline in the futures market to recapture those losses and to actually tack on an additional 257 point gain in Wednesday’s (November 9th) session.
The key takeaway is that correctly interpreting investor asset flows can give investors critical information, and often a big edge, at major market turning points.
Asbury Research subscribers can view both of reports referred to in this note, as well as all current research on the US stock market, market sectors, US interest rates and key ETFs, by logging into the Research Center via the big gold button in the upper right corner of the screen.
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