The stock market has performed remarkably well since the April 22 follow-through day. One reason is that distribution days have been virtually nonexistent on the Nasdaq composite.
One of the best ways to gauge institutional selling in the stock market is by monitoring the distribution day count every day in The Big Picture column. A distribution day occurs when one of the major stock indexes, namely the Nasdaq composite and the S&P 500, falls more than 0.2% in higher volume than the prior session. A distribution day isn't hard to recognize, but they're not all created equal. As an example, a distribution day where an index slump of 1% carries more weight than a decline of, say, 0.3% to 0.4%.
Through Wednesday, the Nasdaq showed just three distribution days since May 21. And one of those days was a stalling session on May 29 when the index rallied nearly 0.4%, but closed near its session low after an early pop. That means it's not an index under meaningful distribution at this point.
On the other hand, the S&P 500 showed six distribution days through Wednesday, with four of those days clustering over seven trading sessions from June 5 to 13.
When distribution days cluster over a short period, it can often presage a market downturn. But it's also important to look at each distribution day to gauge the intensity of the selling. For example, out of the S&P 500's four recent distribution days, only one showed a decline of more than 1%. Two other days showed modest declines, and the other was a stalling session on June 9.
Out of the S&P 500's six distribution days since May 20, only two showed decreases of at least 1%. The takeaway is that the S&P 500 is not in a major distribution phase at this point, despite what looks like a high distribution day count.
For now, the stock market uptrend is firmly intact due to limited signs of institutional selling. But if big percentage declines in higher volume start to increase in frequency, that would be a sign to start playing defense with your portfolio.
Earlier this year in late January, distribution days started to cluster on the Nasdaq composite ahead of a sharp pullback.
A 0.5% decline for the Nasdaq on June 24 didn't have the feel of intense institutional selling (Point 1). But a 3.1% drop in higher volume the next day sure did (Point 2). A 0.3% decline on June 31 didn't look bad on the surface (Point 3), but sellers knocked the index well off highs after an intraday gain of 1.5%. The index fell another 1.2% in higher volume the next day (Point 4). After rallying in light volume for three days, the Nasdaq reversed lower on Feb. 7 for a loss of 1.4% (Point 5).
The clustering of distribution days ultimate sparked a 26% pullback for the Nasdaq that started in mid-February.
Follow Ken Shreve on X @IBD_KShreve for more stock market analysis and insight.
