IBD’s Market Pulse shows a current outlook downgrade to “Market in correction.”
In a correction, the proper strategy is to quickly get off margin, raise cash, cut losses fast in your poor performers and let go of other stocks that threaten to wipe away recent gains.
Those who hold big profit cushions in a given stock can decide to hold out, especially if the stock is still in the early to middle stage of its rally cycle. But at some point, one must draw a line in the sand.
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Investors love market rallies, but major indexes such as the Nasdaq and S&P 500 can’t keep rising forever. And when the market tops and starts heading south, your hard-earned gains in stocks could evaporate fast. So it is very useful to know how to find out when a market’s uptrend is likely to end.
That’s why IBD helps market watchers stay on top of distribution days by keeping a tally in the Market Pulse graphic that accompanies each day’s Big Picture column.
History shows that major market tops are preceded by a flurry of distribution days and severe weakness among the leading stocks. Also, the market tends to peak well before the economy does. That’s why the market is a leading economic indicator.
A distribution day results from a drop of 0.2% or more on the Nasdaq composite or S&P 500 in volume that’s higher (on the Nasdaq and NYSE, respectively) than the prior session. Rising volume as the market sells off points to heavy offloading of shares by institutional investors.
So when you see a sharp increase in the number of distribution days, even as the market is rallying, take the action as a timely signal that a serious correction could be just ahead.
A random distribution day here or there won’t hurt an uptrend. What you’re looking for is a cluster of heavy selling sessions — usually five or six or more — in several weeks’ time or less. That doesn’t mean the market rally immediately comes to a screeching halt. But it’s a smart time to get defensive by locking in profits and cutting losses short.
Stalling days offer another warning sign that the end of a rally may be near. These are more subtle than distribution days. Stalling typically occurs when a major index is up 0.4% or less in volume greater than or equal to 95% of the prior day’s action. The index also must close in the lower half of the session range.
The Big Picture and Market Pulse help inform readers on how the market is faring — including the rise in both stalling sessions and distribution.
It’s worth reiterating here that daily volume doesn’t have to run above average to count as a distribution day — it just needs to be higher than the prior day.
In 2011, distribution days piled up in the NYSE composite ahead of the mild bear market. The Nasdaq and S&P 500 have since taken over as the key indexes to watch, but back then, the NYSE was one of the majors too.
It got hit with a number of distribution days and stalling days earlier in the year, but shook them off to continue its uptrend. On April 7, the NYSE fell 0.2% in higher composite trade, a distribution day. Declines of 1% and 0.8% on April 12 and May 3, respectively, followed in heavier trade.
The Market Pulse reflected a market outlook change to correction on May 4 (1), after the NYSE fell 0.9% for its fourth distribution day in less than four weeks. The index slumped 26% from its May 2 high to its Oct. 4 bottom.
Read More At Investor’s Business Daily: http://education.investors.com/investors-corner/751793-distribution-days-signal-market-top-near.htm#ixzz3ZkHwRsoY
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