Page 1055 - How to Make Money in Stocks Trilogy

42 HOW TO MAKE MONEY IN STOCKS—GETTING STARTED

“Distribution Days” Alert You to a Weakening Market
When the market is in an uptrend, you know at some point the tide will turn
and a new downtrend will begin. You can see when that shift may be occur-
ring by looking for what we call “distribution days”—days of heavy selling in
the major indexes. (“Distribution” is just another word for selling.)
A distribution day is when one of the major indexes closes down at least
0.2% on volume heavier than the day before. (Stalling action—when the
trading volume increases, but the closing price barely budges—can also
count as distribution.)
We’ll get into how to handle a weakening market when we go through the
Selling Checklist, but here’s the key point: A rising number of distribu-
tion days shows that institutional investors are beginning to sell
more aggressively. And we’ve already seen, it’s the enormous buying (and
selling) power of mutual funds and other big investors that ultimately drives
the market—and individual stocks—either up or down.
Of course, fund managers try not to sell so aggressively that it becomes
obvious to everyone what they’re doing. Yet their size and trading volume
make it difficult to hide. That’s why tracking distribution days is so impor-
tant: It helps you gauge how serious the selling is and see if a true change in
trend is emerging.
When the number of distribution days begins to mount, the Market Pulse
outlook shifts from “Confirmed uptrend” to “Uptrend under pressure.”
That’s a warning sign that more trouble may be on the way.
That selling may ease and fade away, allowing the market to continue its
climb. But if that downward pressure picks up steam, look out!
If you get 6 distribution days within any 4- or 5-week period, the uptrend
will typically roll over into a downtrend. You can see the current number of
distribution days in the Market Pulse, and if you get enough days, the
Current Outlook will shift to “Market in correction.”
See the following S&P 500 chart for an example of how distribution days
mount, and the Market Pulse changes from “Confirmed uptrend” to
“Uptrend under pressure” and finally to “Market in correction.”