As we have recently pointed out (here [5]), the exponential level of global central bank one-upmanship has created a level of dependency in capital markets never seen so obviously before. Critically, though, it is not the sheer scale of the balance sheet (or STOCK of assets) that is good enough anymore - equity market performance is all about the marginal change in that stock (FLOW). Nowhere is this "It's The Flow Stupid" better highlighted than in the chart below showing the periods of central bank balance sheet expansion coinciding almost perfectly with the largest surges in equity market performance. Furthermore, as the flow fades so the performance starts to fade (unable to counter the natural tendency of retail to exit the risky markets perhaps) and as the Fed's balance sheet begins to actually compress marginally (as it has the last few weeks), so equity market performance has turned negative - and notably so. This leaves the Fed with the dilemma that it is not just about the size of the bazooka anymore but the frequency with which you are willing to use it - and as we are likely to see this week - jaw-boning alone will not do the trick (no matter what today's market might have been hoping for) as unless we see the balance sheet of the Fed expand again (which would mean a rise of around 0.4% - something we haven't seen since mid February), we should expect the rolling 4-week performance of equities to continue to fall.
Fed Balance Sheet FLOW...
[6]
The heavy 'positive' flow from late November (green oval), surged equity markets. Their performance (green arrow) has not been better than at that time for the last five months.
As that flow faded to light marginal flow (orange oval), then rolling performance (orange arrow) started to wane.
Interesting side-note that this week and last are the first to see a negative rolling four-week performance (red arrow) since the rally began which coincides with an extended period of Fed balance sheet compression (negative flow - red oval).
Or an alternative is the Aggregate Monetary Base FLOW...
[7]
which is perhaps even more closely-related?