Money flow indicates staying power. When money is flowing into a sector, related stocks will often develop sustained uptrends and bounce after pull backs. And when money is flowing out of a sector, you might see pops get successfully shorted and bearish trends establish themselves.

I use the Growth 250 list created by Investor's Business Daily (of which I am unaffiliated) to understand the depth and breadth of the market any given week. This is their best estimation of the top 250 growth stocks in the market. I keep a running study of this list, tracking money flows between subsectors.

So Where is Smart Money Going Right Now?

TL;DR… This week:

Long Side

1. Aerospace/Defense: NOC LMT
2. Energy-Solar: ENPH FSLR ARRY
3. Food-Packaged: CPB CAG GIS TWNK SJM
4. Insurance-Various: WRB ACGL PGR
5. Medical-Biomed/Biotech: VRTX APLS CPRX

Short Side

1. Semiconductor Equipment: TER ASML
2. Freight Transportation: YELL ODFL ZIM CP XPO

Our Findings:

A lot of changes from the last week when the Fed looks to be getting ready for another big rate hike. On the long side, there we see some rotation into defense-type plays. Sectors to watch: Aerospace/Defense, Energy-Solar, Food-Packaged, Insurance and Medical-Biomed/Biotech. To the short side, we are looking at a pause for Oil & Gas with more damage coming to sub groups that service semiconductor manufacturing, in addition to lower freight demand signaling investors to sell Transportation.

The Long Side

1. Aerospace/Defense: With more and more weapons flowing from American companies to the war in Ukraine, the Department of Defense is going to make it even easier for US Defense companies to sell their products to other countries in need as well. Most of the names in the sector trade on lighter volume so the best companies are very hard to trade. A few tickers to follow with enough liquidity include the usual players NOC LMT
2. Energy-Solar: With these names holding big moves they made a month ago, they seem to be setting up again with a good amount of inflow this past week. ENPH is the sector leader but FSLR ARRY are both expecting some crazy growth in the coming quarters.
3. Food-Packaged: Here we have a nice defense sector that is showing some strength with a large amount of names getting inflow. These are not huge movers but great defense plays for a potentially choppy week coming in. We like CPB CAG GIS TWNK SJM for their fundamentals and will be watching them all week.
4. Insurance – Various: When insurance companies are allowed to invest the premiums they hold into bonds, they benefit from rising yields like we are seeing right now. This is why these are seeing an uptick. Some solid names to watch include WRB ACGL PGR
5. Medical-Biomed/Biotech: We are seeing more flows into ‘defense-growth’ healthcare plays as well — which has been a theme off and on for some time this year. The key is they get their revenue from governments and large corporations which are dependable and consistent regardless of economic conditions. We like VRTX APLS CPRX

The Short Side

1. Semiconductor Equipment: These are a lot of companies that supply equipment and supplies for semiconductor manufacturing. This selling represents the damage that is suffered upstream as the entire semiconductor sector struggles and this is now flattening out to the outlier players like these. Some potential shorts right now are: TER ASML
2. Freight Transportation – Various: We are seeing lowering demand for freight transport and projecting even lower traffic for next year. A few names to watch for weakness: YELL ODFL ZIM CP XPO

Review: Last Week

Last week we looked for longs in Chemicals-Agricultural Oil & Gas and Utilities.

Ag chemicals continued to consolidate, shaking out weak holders and creating a nice handle. Oil & Gas was a bit stronger but also remained inside last week’s high and continues to consolidate. The strongest names made modest gains on the week.

The market agreed much more with our predictions on the short side. Computer software was an easy target as growth companies are getting slapped by more hawkish posturing by The Fed. We targeted a few companies that are overvalued with highly specialized and under-diversified product or service — the DDOG short idea finished -9% on the week with OKTA closing -30%.

Why Look at Market Rotation?

Day traders can use subsector momentum studies like this one to identify momentum stocks and develop greater conviction in a predicted move.

Keeping an eye on this flow has proven to be a huge boon to our edge. We have found that when we trade in subsectors that are having changes in money flow that there is an increased level of continuation that correlates to the flow, whether positive or negative. And to put it simply, this translates into bigger moves with reduced chop.

Momentum studies like these can help make trading simpler. Even so, we believe in the trading community and that's why we share our research. As always, drop your thoughts and questions in the comments.

Long live /r/stocks!