There is an interesting pattern developing in the stock market these days. And while this pattern may be rooted in a very old-school concept – which may or may not apply to today’s fast-moving, algo-driven markets – it is worth noting all the same because the implications are worrisome.
In the old days, you know, when humans made the decisions when to buy and sell stocks, analysts could study the order flow and determine whether the big boys were accumulating stocks for their portfolios or slowly distributing them. The idea here was simple. When stocks were under accumulation, there was consistent buying in the market as institutions slowly added to positions over time. And conversely, when the big boys were trying to lighten up on their equity holdings, the market displayed a pattern of slow and steady selling.
In essence, during a distribution phase the market would struggle to make any headway and all rallies were sold into. You see, when you were a pension fund manager with a boatload of stock to unload, you didn’t do it all at once. No, you slowly “distributed” the positions to eager buyers over time so as to not tip your hand.
Typically, the tell-tale sign of a distribution phase would be obvious in the breadth and volume statistics. And those seeing the glass as at least half-full these days remind us that the Advance/Decline Lines and the Up-to-Down Volume indicators remain in good shape. And because of this our bovine buddies suggest that all is well and it is only a matter of time before stocks begin movin’ on up again.
David Moenning is Mr. Moenning is President of Heritage Capital Research, a privately owned, investment research firm. Heritage focuses on active risk management and an “own the best and ignore the rest” equity selection strategy.
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Positions in stocks mentioned: none
The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management (HCM) and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security or Heritage Capital program. No part of this material is intended as an investment recommendation. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any of HCM’s programs. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that investment objectives outlined will actually come to pass. Investors should consult an Investment Professional before investing in any investment program. Neither Mr. Moenning or Heritage Capital Management nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Mr. Moenning and employees of HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while this publication is in circulation. The analysis contained is based on both technical and fundamental research. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.