What is stock market distribution?
First things first: One of the key elements in forming a trading strategy is understanding where the big money is flowing. Money flow is defined simply as accumulation (buying) and distribution (selling).
When a stock market is under accumulation, it is obvious. Volume levels are moderate to high, stock prices are breaking out and the indicators are constantly flashing bullish signs.
Stock market distribution is a bit harder to discern. Falling prices on heavy turnover stands out, but it’s a very slow process. For those wanting to catch low prices, the results can be very rough.
Why is it tough to read?
Money is currently flowing out of tech stocks and into other sectors like 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.
When institutions are selling there is no way to tell when it’s going to stop. Even if a company says the right thing or their stock moves to the upside, it doesn’t seem to matter (at least in the short term). This makes it hard for us traders. If you’re on a bull train, how are you supposed to know when to get off?
3. Signals are rarely clear
We look at charts and technicals for signs of stock market distribution. This allows us to be objective, analyze it and take action.
So here is our current situation:
The Nasdaq has been under severe distribution for nearly a month now. All signs pointing to heavy selling and institutional distribution by mutual funds, hedge funds, pension funds, banks and trusts. They are exiting positions that were likely strong gainers from the beginning of the year.
As I said above, this is not often a short term event. It is a drawn out process of “stock for sale” – day after day. You will hear the media say that a correction is at hand, but they certainly won’t say when.
What should I do about it?
Well, the current stock market distribution is not over. When the dip buyers fail to show up, there is still more downside to come. Use care and caution when it comes to fighting distribution. It might just pay to wait for the selling to subside, thus providing you with good entry point opportunities.
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