As a market watcher, one of the key elements in forming a trading strategy is understanding where the big money is flowing, like market distribution. We define money flows simply as accumulation (buying) and distribution (selling). There is little to dispute when a market is under accumulation: volume levels are moderate to high, stock prices are breaking out and the indicators are constantly flashing bullish signs. Yet, a market in distribution is a bit harder to discern, though falling prices on heavy turnover is not too hard to capture. Further, it's a very slow process and for those wanting to catch low prices, the results can be very rough.
Why is a distributed market tougher to read? One thing is rotation. Currently we have seen money flowing out of tech stocks with vigor and into other segments such as financials and transports. These two groups are making new highs day in and day out now, while the high beta tech names are suffering from a mass exodus of institutional flow.
We have said there are a million reasons to sell but only one reason to buy (a stock going higher, that's it!). It is not too complicated. But certainly the challenge when one is on a bull train is to get off the train before the rest of the crowd. Who wants to be the last one left at the party when all have left?
When institutions are selling there is NOTHING to tell you when it's going to stop, and when stocks seem to say/do the right thing, it doesn't seem to matter (at least in the short term).
When a market is under distribution we look to the regular signs and come up with an objective point of view, analyze it for what is happening and take action. The Nasdaq has been under severe distribution for nearly a month now, all signs point heavy selling and institutional distribution. These are mutual funds, hedge funds, pension funds, bankds and trusts exiting positions that were likely strong gainers from the beginning of the year.
But this is not often a short term event, rather a drawn out process of continue 'stock for sale' day after day. Some will say a correction is at hand, but you won't find these people getting back into the game here nor saying where a good entry point might lie. Naturally, the process is not over, and when the dip buyers fail to show up we know there is still more downside to come. Use care and caution when it comes to fighting a market in distribution. It might just pay to wait for the selling to subside, thus providing good entry point opportunities.