U.S. Stock Market Distributed: Downdraft In Store?


The Standard & Poor’s 500 Index (SPX) has sold-off on heavier volume in four of the last five trading sessions, according to Investor’s Business Daily. Dubbed “distribution” days by the stock market-oriented newspaper, distribution refers to a net movement of stock from the portfolios of institutional money managers into the hands of retail investors. Institutions have, on balance, distributed stock four out of the five previous sessions in the S&P 500. Today did not count as distribution because the total NYSE market volume was lighter than yesterday.

The broad-based stock market index was down a modest 12.01 points or 0.58 percent today, less than 100 points away from its all-time of high of 2,134.72. The U.S. stock market as measured by the S&P 500 has, literally, gone almost sideways, right below all-time highs in 2015. The index is up a steady 0.42 percent this year. Other U.S. stock indices, the Dow Jones Industrial Average (DJIA) and the NASDAQ Composite (IXIC) are down just over 2 percent and up 6 percent this year. Hardly gangbusters, but things could certainly be worse.

SP500 vs SSE

The Chinese stock market, on the other hand, is an entirely different story. After topping on June 12, China’s SSE Composite Index (SSE), and other Chinese market averages, have experienced round after round of vicious selling and distribution.

The SSE Composite is down close to 29 percent since early June. China’s other leading index, the Hang Seng (HSI), is down close to 15 percent from similar June highs. Is the U.S. market taking cues from China? One thing is for sure, sellers have been piling on in U.S. indices in recent sessions.

Stock market observers often ask why a market goes up or down. News reporters will often focus on a news report from that day that ought to affect the market, and it becomes the reason a stock moved in price. Really though, stocks go up when more people buy than sell and they go down when more people sell than buy.

When institutions operate so that at the end of the day they have moved stock from the hands of retail investors into their portfolios, it is said that stocks have been accumulated.

Investor’s Business Daily keeps close watch of the number of accumulation and distribution days in the major stock market averages. A group of five or more distribution days in a short period has been shown to have the ability to send stock averages into downtrends. So far, this hasn’t happened with the U.S. stock market. A few more days of selling could cause Investor’s Business Daily to change its market outlook to downtrend and potentially accelerate losses.

An astute money manager who successful picked the top of the dot-com bubble using precisely this distribution day technique is Kevin Marder, former chief market strategist with Ladenburg Thalmann Co., who has recently been upbeat on the prospects of the U.S. stock market and notes names like Amazon.com Inc. (NASDAQ: AMZN), Facebook Inc. (NASDAQ: FB), Netflix, Inc. (NASDAQ: NFLX), Under Armour, Inc. (NYSE: UA), and others as examples of leading growth stocks that have recently broken-out of price consolidations and reached new high ground: action that he interprets as bullish.

Stock markets can only make extended advances when fueled by positive price action in the shares of young, entrepreneurial companies that are growing their sales and profits in excess of 20 percent per year and being purchased at new high prices on a daily basis. In 1999 it was Yahoo!, eBay, Qualcomm and Amazon. In 2015 it’s Netflix, Facebook, Under Armour and Amazon. That each stock sits near all-time highs and that they have moved together as a group suggests further upside to some growth stock observers, so long as market averages can overcome recent distribution, which is entirely possible.

[Photo by Spencer Platt / Getty Images]

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