Note: Add consumer confidence measurements to the list below: Consumer Confidence Tumbles By The Most In 5 Years. (link)
There is a growing divergence right now between the upward movement in the S&P 500 and the flow of cash out of the stock market – click to enlarge:
The graph was sourced from Business Insider and you’ll notice that they’ve highlighted the obvious divergence between stocks (red line) and stock market cash flows (blue line). However I thought it was interesting to note that in the two previous incidences of divergence between the two metrics – noted by the black boxes added by me – they eventually converged back into correlation. You’ll also note that it seems that the direction of cash flows “pulls” the direction of stocks.
Obviously the current divergence is now extreme. If this is resolved with the stock market once again getting “pulled” in the direction of cash flows…well you can figure out the conclusion.
Perhaps what’s most interest to me is that it would appear that cash is “crashing” out of the stock market. I have been arguing that the underlying fundamentals of the economy are beginning to crash. We are seeing this with nearly every economic report now, especially non-Government produced reports. The phrase “worst decline since 2008/2009” in reference to economic data has become pandemic.
Interestingly, the “crash” in cash from the stock mirrors the crash in a lot of charts we are seeing of underlying fundamental economic indicators like oil, lumber, Baltic Dry Index, new orders placed with manufacturers and, of course, retail sales.
It’s hard to say when the stock market and cash flows will re-converge, it’s even harder to predict in which direction the convergence will occur – i.e. cash flowing back in (likely injected by the Fed) or stocks crashing – but I would suggest that if this divergence continues, with stocks moving higher and cash leaving stocks, the Fed has greater control over our markets than anyone outside of the elitist circles understands – and that’s a truly frightening prospect.
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