Distribution Days Come In Different Shapes and Sizes

Distribution Days Come In Different Shapes and Sizes - MarketSmith India

“The market isn’t easy – it doesn’t wait until everyone is ready, prepared and certain.” – William J. O’Neil, MarketSmith Founder

MarketSmith India readers have heard or read the term “distribution” at MSI workshops, or inside the pages of the Weekly Big Picture.

It is synonymous with institutional selling, whether it is in an individual stock or a major stock index. Big downside moves in explosive volumes are the clearest signs of a distribution, a sign that mutual funds, hedge funds, banks, and insurance companies are unloading shares.

A distribution day is counted when the Nifty or the Sensex falls by at least 0.2% in volume, higher than the prior session.

By itself, a distribution day or two spread out during an uptrend isn’t a big deal. But if they begin to occur more frequently — usually a cluster of five or more in several weeks — it may be time to get defensive by locking in profits and cutting losses short.

Distribution days, or higher-volume declines, are monitored daily in the ‘Daily Big Picture’ column. But there are nuances to them, and it is important to differentiate mild from heavy distribution. When the distribution day count hits 5 or 6 in the Market Pulse, that is reason to be cautious, but the market has shown in the past that it can hold up even when the distribution day count is elevated. There were instances when the indices had a distribution-day count of 5 or 6, yet they were holding near highs, and the leading growth stocks were generally in good shape. Like in the Sensex, despite the current distribution day count of 4, the index is trading near its all-time high. Remember, in most cases, a 0.2% or 0.3% decline in higher volume isn’t as severe as a 1-2% decline in higher volume.

Distribution can also come in the form of a stalling action. A stalling day is more subtle. It generally occurs when an index rises a small amount, but closes in the bottom half of its intraday range. Stalling involves a day of rising volume (or within 95% of the previous day’s trade) without much price progress. This is easily overlooked because distribution via stalling may come even on an up day!

So, while the naive investor is happy to see another small gain in the index, savvy investors recognize that there is heavy institutional selling into the day’s rally that curbs the gain.

We recently had one stalling day in both the Nifty and the Sensex during the week, and markets haven’t shown much enthusiasm since then.

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