Can Money Flows Predict Stock Returns?

"Money flow" is defined as the difference between uptick and downtick dollar trading volume. Despite little published research regarding its usefulness, the measure has become an increasingly popular technical indicator. Our analysis demonstrates that money flows are highly correlated with same-period returns. We also found strong evidence of "money flow momentum," in that lagged money flows can be used to predict future money flows. Most important is our finding that money flows appear to predict cross-sectional variation in future returns. Their predictive ability is sensitive, however, to the method of money flow measurement (e.g., the exclusion or inclusion of block trades) and the forecast horizon.