I am fascinated by the stock market. I am also an active investor, and the amount of analysis devoted to market behavior is amazing.
I have read about the so-called “chartists” who attempt to determine stock pricing trends by arcane analysis of the shape of the price vs. time curve…of course, this is felt to be mostly bunk(I agree).
What interests me is the enormous flows of money that happen every day, on the exchange-many stocks trade several million shares per day, some may reach 100 million shares per day. Because of this, there are huge amounts of cash circulating around.
I see the market as a vast game-when confidence in stocks wanes (for whatever reason), huge positions are liquidated-this cash goes looking for a home (in treasury bills, bonds, money market funds, etc.) After a while, confidence in stocks returns…and now people are buying. The cash is now absorbed by the buying of stocks.
What I am asking: Is there a formal study of the cash flows in and out of the market, as a means of predicting market trends?f there is, anybody know where I can find out more about it?
It’s really not clear to me whether there’s anything to this idea beyond the observation that stock prices go up when lots of people are buying and down when there are lots of people selling. Am I missing something?
There are certainly studies of flows into and out of mutual funds, though I can’t give you a cite off the top of my head. I’m not sure exactly how you’d even measure total flows into and out of the stock market as a whole with the data we have (which is mostly just volume and prices).
You know if you sold your stocks and withdrew the money. But how does an analyst or econometrician know you didn’t just buy other stocks? You can measure the total value of all the stocks, but changes in this figure is not the flow in or out as much of that is just imputed gains or losses with no sales involved.
Remember that, for every seller, there is a buyer. So money isn’t really constantly entering and exiting the stock market in the sense that you have in mind. Money only really enters the stock market when there is a public offering (which may or may not be an initial public offering, or IPO), and it only really exits the stock market when a company repurchases its shares, merges into or is purchased by another company, or liquidates. In contrast, debt issuances constantly are maturing, so it really is meaningful to talk about money entering or exiting a debt market.
The Investment Company Institute does have statistical information on amounts invested in and withdrawn from mutual funds that you may find useful. For example, their July 2010 issuance on Trends in Mutual Fund Investing is at http://www.ici.org/research/stats/trends/trends_07_10.
For the reasons jbaker mentioned, it’s not really proper to think of “cash on the sidelines.”
But, there are some types of studies that you might interest you. Check out this page.
I’m pretty sure that on any given day those numbers are identical.
Check out the commitments of traders report that comes out weekly - Commitments of Traders | CFTC that might give you a rough idea. This is related to futures trading but that includes futures on things like stock indices.
Your question is somewhat vague, but you might be thinking of the money flow index