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Chapter 10. Flow of Funds

Chapter Objectives

By the end of this chapter, you should

  • Understand why knowledge of the flow of funds is important to determining stock market valuation

  • Understand why liquidity plays an important role in potential stock market valuation

  • Be familiar with measurements of market liquidity

  • Understand the relationship between Federal Reserve policy and the cost of funds

Thus far, we have covered four of the five necessary ingredients for making a reasonable assessment of the market’s future direction. We have looked at the primary trend, as defined in the Dow Theory; at sentiment, to see how different types of investors are thinking and acting; at market indicators, as confirmation of or divergence from the trend; at seasonality; and at other temporal tendencies. In this chapter, we look at the fifth ingredient. Our focus is on what propels markets in one direction or the other—money, traditionally called the “flow of funds.”


  

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