A common phrase in investing is “follow the smart money.”
Traditionally, this means finding what whale investors (like Warren Buffett) are buying and selling.
In most cases, we don’t know where that “smart” money is going until after it actually arrives. Only Wall Street’s elite have to file quarterly reports with the Securities and Exchange Commission.
This means that Buffett could have invested in Occidental Petroleum (NYSE: Oxy) in July, but unless you’re looking hard, you won’t know about it until the quarterly filing is published in September or October.
Many things can happen between the time Buffett invested and the time you learned.
What if I told you there was another way to track where the money goes?
there!
It is an excellent way to track the sentiment of institutional investors.
Let me explain…
Where does the money go…
Instead of waiting for quarterly reports, you can track the inflows and outflows of stocks and exchange-traded funds (ETFs).
Studying these flows is a valuable tool for identifying market trends and determining where investors are investing their money…or withdrawing it.
Tracking stocks that have had a lot of money flowing in or out can also tell you something about investor sentiment.
If a stock sees a significant rise in incoming funds, you can conclude that investor sentiment is high. People want to buy stocks and participate in the rise.
Conversely, if there is a large amount of money coming out of the stock, sentiment may deteriorate.
It’s not an exact science, but it can point you in the right direction. Let me show you…
The chart below shows the money flow history of the Industrial Sector SPDR Fund (NYSE: forty-first):
If you look at September 2022, you’ll see a huge spike in cash flow into XLI just before the stock hits bottom.
It took some time, but the downtrend reversed itself, and XLI started a strong rally.
I bring up XLI for a reason…
Good start for XLI in November
On November 1, I saw the news hit my device…
Daily flows of the XLI ETF amount to $695.8 million
This is significant because it was the largest single-day increase in a year for the European Investment Fund, which tracks the industrial sector. The fund’s assets increased By 3.5% to $20.5 billion.
In the past 12 months, XLI has seen net inflows of $1.62 billion…which means more money is coming in than going out.
After reading that, I x-rayed the energy ratings for the Green Zone on XLI… and evaluated each of the properties and determined the overall average rating for the ETF. Here’s what I found:
XLI prices are “neutral”
XLI’s rating is “Neutral” 50 out of 100 On Adam’s Green Zone Power Ratings System. It is set to track the broader market over the next 12 months.
This may not sound exciting in and of itself, but I went back to see what the ETF rankings were like a month ago.
Today’s rating is a 2-point increase from last month.
What’s even more telling is that XLI’s Momentum Factor Rating currently stands at 57. A month ago, it was just 49… Increase 8 points.
This rating increase, coupled with increased flows into ETFs, may indicate strong bullish sentiment in the industrial sector of the S&P 500.
We will continue to track XLI in the coming weeks and months to see how things fare after the election.
Tracking these inflows and outflows combined with Adam’s Green Zone Power Ratings system is a powerful way to keep track of money.
It’s also much better than waiting months to see where big investors like Buffett are spending their capital.
That’s all for me today.
Until next time…
safe trading,
Matt Clark, CMSA®
Senior Research Analyst, Finance and Markets
