Lessons from the Pros


Big Money Flow

As a student of Online Trading Academy, I was taught to watch the actions of the big brokers and to mimic them as they took money from the uneducated, naive investors and traders. As a trader and instructor, I live by this and continue to teach it in the classroom.

The brokers and institutions are not our enemies. They are not necessarily our allies either. However, they can shed light on some of the direction the markets will take. Imagine walking through a jungle, you can either slash a new path through the thick greenery using a machete, or you can simply stroll through on a path that was created by elephants. Which do you think is easier?

So why do we try to cut through the markets and forge our own paths when the large players are showing us the best way? One of the tools I use to see when the institutions may be buying or selling the stock markets is their money market account balances.

When the big players are not actively long in the markets, they need a place to park their cash. Bonds can be an alternative, but bond purchases require liquidating the position before being able to buy equities. A better place to store ready reserves is in the money market. This money is easily deployed when markets offer the opportunity. I understand that this is an assumption about the flow of money, as the money may be going into treasuries instead of equities. However, I will show you how this action can be used to predict changes in the equities’ markets.

The Investment Company Institute, (www.ici.org), tracks institution versus retail money market levels. They update this list weekly and can offer insights as to the strength or weakness of the trend. When I go to the site, I perform a search for “money market withdraws.” The file I am looking for is Money Market Mutual Funds Assets.

ici website

When we go to the selection, you can see the change of funds divided into several sections. Keep in mind that the numbers are in millions of dollars.

April ici flows

The data I focus on most is the Total Retail versus Total Institution. I am looking for times where they are at odds with each other. When we see institutions putting money into safe money markets while the retail public is withdrawing, it is a warning that the bullish trend in the equity markets may be nearing an end.  If the retail investor is depositing money into money markets while institutions are withdrawing, it may signal a market bottom.

An example is the historic data, found under the same search under Money Market Mutual Fund Assets Historical Data. Looking at the data from March bottom, we see that in the weeks leading up to it, both retail and institutions were putting money in money markets, presumably by withdrawing it from the stock market. On the week of the bottom, March 11th, the institutions withdrew $10 Billion from money markets while retail levels rose by $10.6 Billion!

For more evidence on the clues the institutions give us, look at what is currently happening in the markets.  Many news pundits have been saying the equity indexes should be moving higher until the retail investor jumps in.  Institutions are starting to withdraw from equities.  It is a slow withdraw but coupled with retail investing, I am becoming a nervous bull that is tightening my stops and waiting for the big short.

inst moneyretail flow

Remember, the elephant leaves tracks. Do not try to fight your way through the market jungle alone. Walk the easier path and just be careful to watch your step!

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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