Sven Henrich via Northman Trader

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.

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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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