Few investments are screaming buys in today’s markets.
Historical metrics show an expensive U.S. stock market. Europe ex-UK and emerging markets are two areas that have received strong interest and both returned more than 18 percent in this year’s first half. Conversely, the U.K. has many risks—Brexit and its subsequent economic prospects—keeping investors at bay. And U.S. fixed income is still delivering ridiculously low yields.
As an equity analyst and portfolio manager, I find it helpful during difficult periods to supplement my fundamental research with technical signals to aid my buy/sell decisions. One technical signal that I find useful is the money flow index (MFI).
Ditto for Reggie Browne, senior managing director and global head of the ETF group at market maker Cantor Fitzgerald, who believes money flow can be useful when trading ETFs. “There is some meaningful information there that one can use as criteria to understand how the market is thinking about asset allocation,” he says.
For example, he adds, if you see net redemptions in broad market classes like the S&P 500 or Russell 2000, with money flowing into cash or fixed income, you can make a determination on what the market is thinking in aggregate. In this case, the market is assuming a risk-off scenario where participants are looking to buy protection in the form of cash or money market ETFs.
What Is Money Flow Indicator?
Money flow is used to determine if investors are buying (putting money in) or selling (pulling money from) an investment. MFI uses price and volume to measure the amount of market pressure caused by buying or selling to determine if an investment is at unsustainable price levels, signaling an overbought or oversold condition, or if it is at a point where prices may reverse, signaling an entry or exit point.
Most technicians agree that volume leads price movement. MFI, using both inputs of price and volume, provides a technical signal of the opportune time to buy or sell.
Interpreting MFI
MFI moves between zero and 100. As MFI moves higher from 0 toward 100, an investment becomes an attractive buy; as MFI moves lower from 100 toward 0, it becomes an attractive sell. Generally, the middle of the index (50) is the point at which investors want to begin to buy or sell.