No surprise, IBD changes to “Maket under pressure”. Yesterday the Naz hit distribution day 6 in the last 25 trading days and today was an emphatic #7. I thought we might go to “Market correction”, but not quite.
The Nasdaq skidded 2.1%, closing under its 50-day moving average. The S&P 500 and the Dow Jones industrial average fell 1.4% and 0.9%, respectively. Of the three, only the Dow closed above its 50-day line
Volume rose on the Nasdaq and the NYSE.
The S&P 500’s distribution-day count stayed at three. The combination of losses and higher volume gave the index a new distribution day Thursday, but at the same time the S&P junked its July 6 distribution day because of time. After five weeks, a distribution day is no longer relevant to current conditions.
The Nasdaq count rose to seven. Worse yet was the cluster of distribution: The Nasdaq suffered four distribution days in the past six sessions.
Distribution involves a significant decline in a major index in higher volume, which is a sign of institutional selling. Individual investors should never get in a shoving match with the indexes. Funds’ buying or selling power is far greater than what individual investors can wield.
Could the market be marking a short-term bottom? That question might sound premature, even silly. But if a short-term low is being sketched, it would be in line with this year’s action on the Nasdaq. The index has consistently bounced off the 50-day line, though sometimes after a brief and shallow stay under the line.
Rather than play that game again, bulls would probably prefer a heftier pullback. A pullback of 10% to 20% could help chase out the weak holders and perhaps initiate sector rotation.
One gauge for determining whether the market has pegged a short-term bottom is the put/call volume ratio. This secondary indicator closed at 1.08, not quite the elevated level that has marked market lows in the past. A reading of 1.15 or higher is considered bullish for the stock market. The last such day was Jan. 18, when the ratio hit 1.18. From there, the Nasdaq rose 16% in about six months.
Another signal came from the CBOE Market Volatility Index, known also as a measure of investor fear. The VIX, as it’s known, soared to the highest level since May 18. The index climbed 45.5% above its 10-day moving average. Any time it leaps more than 20% above its 10-day average, it can confirm a positive reversal in the market.