Cash Is “Crashing” From Stocks – Is The Stock Market Set Up To Crash?

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:

SPX Cash

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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12 thoughts on “Cash Is “Crashing” From Stocks – Is The Stock Market Set Up To Crash?

  1. question: when we use term flow–is that purely stock being sold? or, how do futures play into this metric of flow.

    in theory could the “public” be selling stocks and that gets measured as flow, but if the fed is buying futures that does not get measured as flow.

  2. Hm, as for your concluding speculation, I wouldn’t QUITE agree – not long term anyway – that it’s a “frightening prospect”, because the power of the Fed to do so is inherently self-limiting and inexorably self-destructive.

    HOWever, your latter speculation, if true, MIGHT corroborate recent speculations about the state counterfeiters’ aspirations to abolish cash altogether, to transition from monetary based valuations to TOTAL state-controlled valuations…

    …which is exactly what Lenin attempted – but failed – to do.

    1. Ya – interestingly, I think the rise rents is over. Denver is now saturated with rental buildings and every
      single building – brand new and older – is now offering 1 month free as a move-in incentive.

  3. Dave, These rental situations really vary state to state, city to city. If you look at Chicago
    or New York, not much is being given away. I guess the population saturation has not
    yet overtaken Denver yet. I have been shopping rentals Reno to the Rockies. The prices
    for the upscale properties seem to holding. Most will negotiate if you are willing to commit
    for two years. I do think that from here into the next 6 to 12 months deals will get better
    as most people are running out of cash and credit.

    1. First, 1 in 4 people in Chicago are “still deeply underwater” on their mortgages I will be addressing that. The upper end is holding up because there is not much in the way of transactions going on. Sure every MSA has it’s own peculiarities, but in general the housing ship is sinking across the country.

      Let’s not forget there’s a massive portfolio of “buy to rent” portfolios that big investment funds are looking to start unloading. That is a Mt. Everest sized avalanche of “shadow inventory.” I’ve been meaning to write about this issue but have not had the time:

      There’s a lot more going than “Wolf” addresses and I will be publishing on that shortly.

    1. Depends on how far of a drop you define as “a crash.” 20%? 30%? If you remove the Fed’s intervention from the equation, there is a giant air pocket underneath the stock market. The HFT algo programs would dump shares so quickly that the market would have to be shut down temporarily. Were you trading the day in 2010 when the Dow dropped 1000 points intra-day? The current set-up would cause that day to look like a civilized tea party.

      1. That’s a good point. The HFT’s will move the markets quickly. Since they added the circuit breakers it does reduce volatility somewhat, they added those after the flash crash.

  4. This is not really too surprising given that the pending rate hikes will cause big money to start shifting out of equities for the time being. What is frustrating is how we have no clear indication or timeline and yet, conflicting sources constantly report both sides of the issue. It makes it tough to trade around the volatility in the broader indexes. It’s like a band aid, just rip it off and get it over with so we can move on. Nobody likes to trade in limbo!

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