Market Analysis

A Mystery

I got a mystery for you, cause who doesn’t love a good mystery.

Record inflows. Week after week, record tech inflows, all year long. Almost daily we get headlines about money coming in and buying equities, passively presumably as that is where most inflows are moving into these increasingly automated ETF driven markets.

Hence no wonder greed is back as we discussed yesterday.

And the charts are impressive, here some samples below:

It’s quite the scene. With such money flows into stocks at all time highs momentum must be off the charts. So I thought.

And this is where the mystery comes in.

Imagine my surprise when I tried to chart money flows and momentum and got quite the opposite result of what I expected.

Here’s the S&P 500 weekly chart with the money flow index (MFI) overlaid:

Now to be clear: The money flow index uses volume in combination with recent price movements to determine whether momentum is up or down.

Clearly based on the chart above momentum is down and it is extremely weak. Where’s the sign of wild exuberant chasing of stocks?

Indeed, as the chart history above suggests, weakening momentum accompanying new highs (this is a weekly chart by the way) has presaged large declines in markets in recent years.

And look how strong the MFI index was in 2017/2018 following the tax cuts. Then the new highs in September of 2018 produced a much lower MFI reading and markets soon dropped 20%.

We had a similar relationship in 2019 that produced a smaller pullback.

But look at it now, MFI is the weakest it’s been on new highs in recent memory.

Now to be sure this is not a fluke I also added the Chaikin money flow oscillator which uses two different exponentially weighted moving averages (EMAs) to analyze momentum.

Add the Chaikin money flow oscillator to the chart and you get this picture:

Lower highs, lower highs, lower highs.

A picture of ever weakening momentum with each consecutive new market high over the past 3 years.

To boot: These most recent highs here following the US election show even lower momentum than the summer 2020 highs. A negative divergence. Just like in 2018 and leadings up to the February highs in early 2020.

The message here: For all the hype, greed and inflows, this market is running on ever weakening momentum. One possible explanation: Retail may be buying, while adherents to the Buffet indicator perhaps are pursuing another strategy as, any way you out it or slice it, markets are historically extended:

Weak and weakening momentum is a tale of mystery worth telling. Good mysteries have a surprise ending. Whether this one will only time will tell.

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Categories: Market Analysis

12 replies »

  1. Well my friend again you are on top of flow and a master chart reader! The just posted Nancy will settle for 908bil bill after fighting for 90 days of wanting 3.5tril then 2.5 was not good but after a fixed election she is ok below 1til. As to the fade rev SPY 365.50. We know HFT run this as 80%+ of trades all day. People do not matter any more just programs to options builds as 366 is call build SPY for WED and no matter what we reach $ builds as HFT Teams run this like a ATM taking $ out all day long 365 was put build on open we gap faded then rev total control now 367 is vol build after 366 just of note!

  2. Now all we need is a rally with increasing volume which will represent the climax phase/blow off top of this bull market.

  3. I’d guess retail option mania is pushing the market harder than retail etf purchases. The smart money will pull the rug out at the time of their choosing. Don’t fight the fed? More like don’t fight the smart money as note that the smart money is not loading up on stocks at these perfect universe three year forward earnings guess-athon levels…

  4. Very good article, even better as I had to read it a few times to grasp it. Upping the ante is good for your readers, thank you for that.
    Still some comments here from other readers talking about rigged elections: zero evidence, as usual, so I will take it as their feelings, and as the saying goes: Effie your feelings (all due respect).
    Lastly, could this be bullish? The Money flows being on lower levels now have room for more money flows, based on a loose D governance?
    I am betting on brrrrrrr towards recovery, production and rebuilding.
    The parallel view is the correction you mentioned early 2021 – very possible to readjust the path towards world victory.

    • Evidence is coming. Many States are going to be overturned this month and returned to their rightful winner President Trump. Mr. Market won’t like it. This will be the fundamental piece of the mystery puzzle to match the weakening technicals as the markets head into correction once again. Just wait for it………it’s coming!

  5. You quote a chart saying “largest tech inflows ever” but show MFI on SPX instead of NDX??

    MFI on NDX shows a divergence, yes, but not nearly as much as SPX.

  6. Two things are infinite: the universe and human stupidity; and I’m not sure about the universe – Albert Einstein Quote

    The insanity in the stock market will go much further and longer than anyone of us could ever predict. However my observation is that the risk is high enough to go to cash then wait for the downturn to start. I.E. the “fat pitch”. Wait for it, wait for it.

  7. I’m seeing an ending diagonal in the $INDU, $SPX and $COMP. Volume is increasing the last several days just as you would expect in the climax stage. However the increases in volume are resulting in very little gains each day from the prior day. A sign of distribution. Today could actually be the top of the bull market.

  8. Sven – What mystery???

    The most marketable commodity on the planet is money, at least that is how I define money, the world’s biggest commodity. Thus, when the world central banks produce an infinite amount of the “money commodity” out of thin air, it affects all other real-life commodities at some point, by some various degree, for all unsuspecting humans that need products and services that require real world commodity inputs. Pull up a chart over the last 20 years of all the major commodities, and you will see that the commodity volatility has been on par with the volatility in the biggest commodity on Earth, fiat money…

    The Fed knows they produce too much “money commodity”, yet they just recently fully comprehend that it mostly went to the top 10%, who do not have the capacity to spend said overproduction of the “money commodity”; therefore, we had a 20-year decline in the velocity of money that is obvious via Fed charts. So, to solve this conundrum, they will do “QE for the people”, which not only benefits the politicians for a few years, but the voters will enjoy buying “something for nothing” for a short while too (Santa will soon be temporarily real…just got goose bumps, you too?). Unfortunately, due to physical based atomic reality (vs Fed fiat electron reality), the velocity of money will spike quickly and the fed inflation dreams will be shockingly finally realized, and then pick your poison. Yields could increase, stocks could collapse, or we try a partial debt jubilee, etc, etc, etc…or a combination of such forced unintended consequences. I suspect the Fed will not be seen as “The Hero” once we hit the limit of Fed ignorance, be it tomorrow of ten years from now. The Fed is simply attempting to delay the inevitable, yet unfortunately I think they are inadvertently expediting the monetary end game instead.

  9. Greatest Recession Ever! Only 3.3 years until we recover all the jobs lost at 245k new jobs per month (today’s fabulous jobs print” and the casino market Billionaire Class scream “Crush the peasants”.

    Make Billonaires Great Again…Build Back Billionaires…Billionaires Rule You!


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