Stock Market Flashes Sell Signals, ‘Topping Pattern:’ Leading Names Distributed

U.S. stock markets have flashed sell signals and signs of institutional distribution.

Investor’s Business Daily changed its widely-followed stock market outlook from “uptrend under pressure” to “market in correction” Friday evening after the Dow Jones Industrial Average (^DJI), NASDAQ Composite Index (^IXIC), and Standard and Poor’s 500 Index (^GSPC) each shed close to 2 percent.

Trading volume increased by 15.6 percent on the New York Stock Exchange and 17.9 percent on the NASDAQ, marking the ninth day of distribution for the NASDAQ and eighth for the S&P500 in recent weeks.

Stock markets have flashed sell signals after being distributed.

Leading growth names like LGI Homes, Inc. (NASDAQ: LGIH) and Fleetmatix Group PLC (NASDAQ: FLTX), which had been in sharp upward trends, were each sold in heavy volume Friday, closing near their lows for the day.

Many stock traders have begun to refer a group of stocks as FANG stocks. These are Facebook, Inc (NASDAQ: FB), Inc. (NASDAQ: AMZN), Netflix, Inc. (NASDAQ; NFLX), and Alphabet (formerly Google) Inc. (NASDAQ: GOOG, GOOGL).

Stocks markets have shown sell signals and distribution.

On Friday, shares of Facebook closed down 3.1 percent, shares of Amazon closed down 3.4 percent, Netflix’s were down 3.3 percent and Alphabet’s two share classes were down 1.3 and 1.4 percent. Trading volume was above average in all but Netflix’s shares, which was just below.

NASDAQ composite index stock chart.

When broad stock market sell-offs occur, stocks that bounce back most quickly, and reach new high price ground the fastest, tend to go on to experience the biggest price advances.

While some investors claim to utilize models that allow them to glean insight into the depth and duration of stock market sell-offs, such as recent analysis stating that the Dow could begin a 70 percent correction in coming weeks, as reported by the Street, the distribution day method outline by IBD does not.

Chart for Facebook stock.

Gary Kaltbaum, a commentator with Fox News and president of Kaltbaum Capital Management, describes recent market action in the Dow and NASDAQ as “a very large topping pattern.”

“This only adds to the recent misery in most of the market sectors,” Kaltbaum was quoted with regard to the sell-off below moving averages and distribution in the major indices.

Chair of the Board of Governors of the Federal Reserve System Janet Yellen will address markets on Wednesday, December 16, after Fed officials meet. Yellen is widely expected to announce an interest rate increase of 0.25 percent in the key Federal Funds overnight rate, effectively tightening credit in the United States for the first time since the 2008 subprime collapse and signalling that, for the first time in almost a decade, Yellen and Federal Reserve officials see concerns with growth becoming secondary to concerns with inflation.

[Photo by Andrew Burton/Getty Images]