Saturday, 17 May 2014

Money Movement Patterns In The Equity Markets

Firstly a quote from Business Standard:



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When bulls are highly confident, there tends to be large net inflows of cash into the secondary stock market. Share prices are bid up across a wide variety of sectors at the same time. When bulls are less confident, rallies are more selective. Traders then try to generate investible funds from within the market itself.

In such situations, money is pulled out of sector A and pumped into sector B. After some time, profits are booked in B and the cash deployed in sector C. Then the money moves from C to D and so on. This way, the net cash inflow into the stock market is less but the velocity of the money deployed ensures prices move.

Share prices gain and correct in rotation, as money moves in and out of sectors in this way. Usually, in a sustained bull run, prices in most sectors see net gains. But there will be sharp sector-specific corrections, as profits are booked and rotation occurs. Sector rotation is therefore, normal at some stage in a speculative rally. Money usually moves out of staid low-beta sectors into high-beta sectors first and then moves through various high-beta sectors. One low-beta sector usually an early target for exits is the fast moving consumer goods (FMCG) segment.

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