The reason why Liquidity inflows and outflows is a critical element relative to the market rallying or correcting:

Liquidity inflows and outflows are easily understood by any corporation. When their cash inflows are positive and increasing, they have money to expand and hire. When their cash is outflowing and negative, their businesses contract and they layoff workers.

The stock market is not any different. If you measured the amount of liquidity flowing into, or exiting the market you would see that these money flows correlate to market rallies and market corrections.

When Liquidity flowing into the market reaches expansion territory, stock values rise and the market rallies up.

However, when Liquidity moves into Contraction, stock values sink and the market goes into a correction.

As you will see on the chart below, that is what happened on May 22nd. The rising stock market liquidity inflows broke its support line to the downside. That signaled a break down on increasing liquidity. Liquidity inflows continued to deteriorate, and then on June 9th. Liquidity levels fell into Contraction ... a condition associated with all corrections.

Many investors are tempted to buy now, thinking that a market bottom is here. The fact is, that such an event does not occur until liquidity inflows stop accelerating down and begin a reversal to the upside. As of yesterday, liquidity inflows were still in Contraction territory and still in a down trend.

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