Guide for the More Experienced

Money flow is the parameter that many warrant investors should refer to before investing. As the name suggests, money flow is the money movements of a stock’s or index’s long and short products in a certain period based on the statistics of all the warrants and CBBCs in the market.

In general, there are two focuses to observe in money flows:

one is the underlying assets, the other is the direction.

If the long position of a stock has a large money inflow, and the outstanding quantity simultaneously rises, it may indicate that investors are optimistic about the stock’s trend. Conversely, if the long position of a stock has a large money outflow, and the outstanding quantity simultaneously drops, it may indicate that investors believe that the stock price has peaked and they are starting to withdraw to make a profit or stop losses.

However, does a large money inflow or outflow mean that it is worth “following the trend”? Not necessarily.
Firstly, different investors have different costs when buying their warrants, and they may have different asset configurations, short-/mid-/long-term investment, profit-locking and hedge strategies based on the profitability or otherwise of their own investment portfolios. In particular, it is possible that some large money flows are merely orders for hedging purposes rather than being directional investments.
Secondly, large money flows do not necessary mean that they reflect correct views of the market. Following the trend blindly may cause potential loss. Therefore, money flow is for reference only. It is advisable for investors to customize their hedging strategies based on their own investment objectives.

In addition to reflecting which types of assets attract more capital in the long/short positions, money flows will be more useful when analyzed together with the trend of the underlying assets.

Long position:
If Ping An Insurance’s long position has a large money inflow, and Ping An’s stock price increased during the period, it may indicate that investors are confident about the strong performance of Ping An and willing to “buy at a high”. However, if Ping An’s long position has a large money inflow, but Ping An’s stock price drops, it indicates that investors are not optimistic about the stock price, and they are merely “buying on a dip” and hoping for a technical rebound as the underlying assets are under pressure of being sold.

Short position:
The same principle applies to short positions. For example, the AIA short position has money inflow, and AIA stocks are being sold during the period, it may indicate that investors are expecting continued weakness in AIA and they are “selling at a low”. However, if a short position is favored while the AIA stock price is improving, it may indicate that investors are “selling at a high” in expectation that the strong stock may suffer a technical dip.

The analysis of money outflows is simpler. If the outflow direction is consistent with the position direction, such as a money outflow from a long position matches an increasingprice of the underlying assets, it is investors “making a profit”. However, if the outflow direction is different from the position direction, such as a money outflow from a long position is coupled with a drop in the price of the underlying assets, it is possible that investors are making “stop loss” trades to avoid further losses due to having taken an incorrect view.

To make the relevant data more useful, Credit Suisse’s Market Money Flow has analyzed money flows in the context of stock price movements, allowing investors to work out the motivation behind the money flow.