Let us say...your friend Joe, gets a paycheck each month and after he pays his mortgage and grocery bills he has some dollars left in the bank. In effect, he is increasing surplus of disposable income to do something with every month. This money can then be used by him to purchase any additional assets.
On the other hand, if Joe is careless his bank account will be running out of money before he is done paying the bills every month. This leaves him in a net deficit and over time could require Joe to start selling some of his other assets in order to keep up with the bills.
The stock market is similar in a way. There is something known as "Liquidity levels", and that is similar to Joe's disposable income.
The more Liquidity that moves into the market(Expansion), the more money there is available for trading up the value of stocks on new purchases. In such cases, excessive "discretionary" money can be used to enhance a process of buying more and more ... and that drives up the stock market.
The downside is that the opposite happens when Liquidity is outflowing, and when Liquidity goes into Contraction. Essentially more money is going out than coming in.
Liquidity levels can thus help you know the market trend. And as is said often the trend is your friend.
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