OT: IBD Uptrend Under Pressure

Today marked the 6th distribution day for the S&P and 5th for the NAZ in last 4-5 weeks, causing IBD to officially change the trend to “under pressure”

Stocks on this board often have a higher beta than the market and tend to be smaller stocks that the big boys like to unload during a downturn. That would indicate to some that it is time to be cautious with new cash buys. If you stay 100% invested and you have a big gainer and have faith in a fallen angel, you might consider reallocation.

Losses were mild and volume was light in the morning, but a wave of selling in the afternoon resulted in a bearish session for stocks. The Nasdaq composite slumped 0.8%, the S&P 500 0.5% and the Dow 0.4%. Small caps fell mostly in line with the Nasdaq, with the Russell 2000 down 0.9%. Declining stocks beat advancers on the NYSE by more than 2 to 1. The ratio was close to 2 to 1 on the Nasdaq. Volume rose on both exchanges, adding a distribution day to the count. Several prior distribution days in the indexes didn’t have the feel of heavy institutional selling, but Wednesday’s session did because of the noticeable weakness in highflying stocks and the intense selling late in the day.

There’s no shortage of technical and psychological indicators saying the market could be ready to pull back. For starters, the Nasdaq and S&P 500 closed below their 10-day moving average lines for the first time since the June 30 follow-through day. The Nasdaq has made an unusually long eight-week winning streak.

Meanwhile, according to the latest data from Investors Intelligence, the percentage of newsletter writers who are bullish is now 56.7%, up from 56.2% a week ago. Both are above 55%, which is considered a danger level. Bears were barely unchanged at 20.2%

A confirmed uptrend that’s now under pressure could have more left, but an elevated distribution-day count, plus weak action in leading growth stocks, is worth heeding. Now is the time to play defense, not offense.

Ah, the put on the S&P I kept thinking were cheap insurance have probably gone up, might need to use spreads.



Some distribution days fell off and new ones occurred, so about where we were at last post. But nothing big and volatile so IBD says not to be as worried as with similar counts in worse conditions - but don’t go buying every shiney stock you see.

As IBD has reported over the years, a distribution-day count of five to six can be enough to kill a bull market. So, is it time to call its demise?

Many technicians and talking heads would certainly like to do so. After all, we are in Year Eight of the mighty bull since stocks bottomed out in March 2009. Sure, the 20% correction in 2011 arguably may have reset the bull clock, but it would be natural for anyone to believe that a bear market is not far from the horizon.

However, even in the case of distribution, quality — not just quantity — counts. Looking at the six distribution days on the S&P 500, the largest decline was a 0.6% drop on Aug. 2. The average loss among the five down days? A mild 0.4%. (One distribution was a stalling session.)

For this reason, as one can see on the S&P’s daily chart, the overall decline from the all-time high of 2193 set on Aug. 15 has been feather-light. At Wednesday’s low of 2161, the overall drop has been limited to 1.5%.

What are some other reasons to view the “heavy” distribution count with a healthy grain of salt?

One, more stocks continue to hit new highs than make new lows. Lately, the banking sector has beefed up the list. With the possibility of another hike in short-term interest rates sometime during the rest of the year, a rotation of money back into financial stocks would help prolong the market’s advance.

Two, other technicals point to decent market strength. The S&P 500 has dipped closer to its key 50-day moving average, but for now it’s still above the support line. The Nasdaq composite has an even larger cushion of gains. Ditto for the Russell 2000.

How about the Dow utilities? Nope. On Aug. 5, the index clipped its 50-day line. Since then, sellers have simply piled on. Over the same time period, the yield on the 10-year U.S. Treasury yield has held steady, but at 1.59% it’s still sharply above its July low near 1.37%.