The markets flashed a heavy distribution day Thursday as the NASDAQ was down 1.4% on volume 60% larger than the previous day. This was the largest showing of volume in two months and is not healthy because it was pure distribution. It was only the second distribution day over the past month so we can’t call this a bear run but please be on the lookout for a possible correction of 5%-10%. Technology stocks led the decline as BIDU gave back 10% of its amazing run.
The DOW was also down half of one percent as volume swelled 30% from the previous day.
The NASDAQ has run up more than 18% since I pinpointed the percentage of S&P 500 stocks above their 50-d moving averages crossed below the 20% oversold level. The secondary indicator was the final chart of study on August 16 as the indicator was hanging below the key 20% line as noted on this chart below (on August 16, 2007):
Ironically, this was the exact bottom as the NASDAQ has been on a rampage ever since, moving from a low of 2,386.69 to a high of 2,834.00.
The number of stocks above their 50-day moving averages crossed above the overbought level of 80 last week and we saw our first major sell-off distribution day yesterday. This doesn’t mean you must rush today to sell all of your holdings but do understand that the next sell-off is not far from happening. Study the chart below and follow the purple line to see where and when the market had peaks and valleys as related to the number of stocks on the S&P 500 above or below their respective 50-day moving averages.
This is only a secondary indicator but one of the most reliable while trying to look for clues to a short term market top and/or bottom. I have come to realize that the bottom signals have been more accurate than the topping signals over the past several years!