What A Great Day

We mentioned last night we were going to discuss distribution days, and what a distribution it was. You hear us talk a lot about accumulation days and distribution days. In essence they are days with relatively heavier volume up (accumulation days) or down (distribution days). They are strong indicators of what Big Money is doing. By big money we mean hedge funds or mutual funds or any institutional buyer.

Understanding the importance of distribution days and accumulation days is not just important to geeky nerdy 1 percenters like me. Anyone who had a 401 K, or a self directed IRA, or any type of mutual fund based asset can benefit from this information. We will give a dramatic example of why at the end of this discussion. An an example that could have saved most readers thousand of dollars and in some cases I am personally aware of, hundreds of thousands.

As we said, the IBD on Monday did a great job of explaining the clinical definitions of how to count and track distribution days. We will steal some of that and summarize it a bit and then show you what a classic example of a crucial turn in the market looks like. We feel comfortable borrowing this content because we constantly suggest you subscribe to IBD and IBD on line.

O'Neil defines a distribution day as an index loss (S&P500, Nasdaq, or NYSE-you can use the DOW as well but we suggest one of the others as the DOW only tracks 30 stocks) of .2% aka .002 on a day when volume is higher that the previous session. For example, on February 29 the S&P 500 dropped .005% and volume was 10.8 million shares versus 7.5 million shares on the 28th. That would be one distribution day.

Keeping track of the numbers of distribution days in the last 25 trading sessions is a phenomenal gauge to feeling the markets health and resilience. It is crucial because that is your read on what the Casino Managers are doing. If we get a long series of distribution days, it means that fund managers are selling. Their fundamental homework and technical observations are saying, let take something off the table. REMEMBER, 70% of the influence of your stocks price is driven by the overall market.

Now you might be thinking, so if we have a distribution day like today we should sell? No not really, a series of 6 or 7 distribution days in a 25 day trading period should cause concern for you. Chances are IBD will announce an "uptrend under pressure" (You would see a yellow flag on the blog). It means to be very cautious. It means that you might want to think about taking some or all of your profit. You definitely don't want to entering new positions.

So how do you keep track of the distribution days? We just told you how to track them, but that would mean creating a log and actually looking at each index at the end of the day. Who wants to work that hard after all is just your money right? You can subscribe to IBD and on page A1 everyday they have Market Pulse where they keep you up to date everyday with distribution day counts for all three indexes. Of course you can always look for the green, yellow, or red flag here in the blog.

Today's issue (Tuesday Mar 6 report on Monday results) have the current outlook as Confirmed Uptrend (Green Flag) and 4 distribution days for the NYSE, 3 on the S&P 500, and 2 on the Nasdaq. Now we have personally checked these from time to time and if you want, use the definition provided above and you can see each and everyone of the distribution days. With the drop today and the early signs of volume we feel we can add one day of distribution to each index.

Now if the market just corrects for a few days, how do we get rid of the distribution days. Well we are measuring a 25 day trading period, so be patient and they will drop off the map. Another way to erase a distribution day would be a blowout day in the market. Now here is O'Neil's definition of a blow out day. It is a little tricky so pay attention. The index in question must rise 6% aka .06 any time during the day after the day that triggered the distribution day.

In the example above when the S&P 500 dropped .005, if S&P 500 jumped 6% higher in any day after that drop, we would erase that distribution day from the total count.

Then the last way to drop the distribution day count is in a prolonged downward spiral and the market goes into a market in correction mode. Which is where you need to sell just about everything, and be prepared to sit on the sidelines until it is ok to get back in the game?

Here is a very dramatic example of what we are talking about. Let's say I an 65 years old and because the market has so good to me over the last 10 years I am heavy on all my mutual funds towards equities. Instead of the age old wisdom of subtracting my age from 100 to determine my asset base of equity to bonds-cash where I would have had 65% in bonds and cash and 35% in equities, I was lulled into the market euphoria of the time and was 65% equities and 35% cash and bonds. 

Now let's look at the chart which happens to be the DOW, but is mirrored by the other indexes we are looking at 36 trading days. Any guesses when they were? Well, we have a series of distribution days culminating in 6 distribution days in 19 trading days. That is a good wake up call to take some profits and maybe even close some positions. If you only had 401 Ks or IRAs, it would be a good time to call your provider and change your asset allocation to 65% bond and cash out of equities or perhaps even more.

If we move forward 5 days we loose a distribution day, but pick up a distribution day (1 would fall off, 7 would be added). Then we see a major drop. We would see 9 distribution days and similar counts on all the indexes. That would be the time to cash out and "get out of the game".

Have you figured out what time frame we are discussing? If you had followed the cues of the market and changed your positions on day, that would be January 14th 2008 with the DOW at 12,800ish. You could have avoided the biggest crash since the 1920's. By March of 2009 the DOW was down to 6,700ish. You could have called your fund managers and said get me out of stock funds and get me into cash or bonds.

Many of you are back to where you were that fine January of 4 years ago. Imagine if you had listened to the market and stayed out until we had some clear signs of accumulations days found new entry points mid 2009. It is not that hard to do.

Now you have a feel for the importance of distribution days. So get IBD and or follow the blog and or do your own homework, but know your market. We hope this was helpful to you. My guess for the IBD tomorrow will be 5 on the S&P 500, 4 on the NYSE, and 3 on the Nasdaq, but still a green flag as it will still be a confirmed uptrend. 

Salve Lucrum