IBD--Investor's Corner: "Look For Professional Selling As Market Tops"
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>>> Monday, September 18, 2000
Look For Professional Selling As Market Tops
By Ed Carson
Investor's Business Daily
Investors lose their way when they can't see the forest for the trees.
Many people focus on their own stocks but don't pay much attention to the general market. Big mistake. Three of four stocks fall when the major averages slide into a bear-market correction of 20% or more.
There's no need to be fully invested during a correction if you know how to spot market tops. Anyone can learn. The same signs show up time and again. But you need to know what to look for.
Watch for distribution on the Dow industrials, the S&P 500 and the Nasdaq. Distribution occurs when one or more of the major averages sell off or churn on HIGHER VOLUME than the prior day.
Investors can graphically follow the major averages on IBD's "General Markets And Sectors" page in the print edition.
Repeated bouts of distribution indicate mutual funds and other big institutions are unloading stock. A market rally cannot survive when the heavy hitters pull out.
Three to five days of distribution over a week or two usually spell the end of a market rally. The market may slog higher for a few days but eventually will succumb.
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The Dow raised several warning flags ahead of the 1997 correction. The blue-chip index suffered three distribution days in a two-week period in July (point 1 in accompanying image).
The Dow continued to head higher, but soon ran into more trouble. The index sold off in higher volume Aug. 1. On Aug. 7, the Dow rose to a new high, but reversed in faster trade (point 2). It faced a third day of distribution the next day. More distribution followed on Aug. 13 and again on Aug. 15, when the Dow sliced through its 50-day moving average.
The Dow tried to rally over the next couple of months, but crashed in late October as the first wave of the Asian economic crisis hit U.S. markets. The Dow didn't hit a new high until Feb. 10, 1998.
Also follow the action of the leading stocks closely. As distribution occurs on the major averages, the leaders often flash their own topping signals. Some stocks may burn out in spectacular climax runs while others head higher in light volume, followed by heavy-volume selling.
As the Nasdaq peaked in March 2000, leading stocks such as Ariba, Siebel Systems and JDS Uniphase began topping and rolling over. Dozens of biotechs topped March 7, the Nasdaq's first distribution day. After the Nasdaq peaked and reversed March 10, biotechs crashed March 14, the index's third bout of professional selling.
When the market suffers several days of distribution, take stock of your portfolio. At the very least, get off margin to avoid deep losses.<<< |
