XAutoplay: On | OffMajor stock indexes are trading tightly and holding near highs, and leading growth stocks are acting well. For the bulls, that’s the best of both worlds.
Meanwhile, heavy institutional selling in the major averages has been limited. Since March this year, there have been only two unequivocal days of pronounced institutional selling, in which mutual funds, banks, insurers and other big investors were dumping stock; one on March 21 when the Nasdaq composite slumped 1.8% in higher volume, and the other on May 17 when the index crashed 2.6% in higher volume.
Meanwhile, the latest Investors Intelligence data showed another decline in bullish sentiment among newsletter writers, along with another increase in those expecting a near-term correction. It’s now at 30.8%, up from 29.8% the prior week and 24.8% before that. The bulls like this data because the crowd is often wrong when timing the market.
Amid a growing chorus of calls for a market pullback, don’t jump the gun and adopt a bearish outlook. Why? Because two things always happen ahead of market corrections, and they are not happening yet.
One, high-quality, market-leading growth stocks always start to break down amid signs of institutional selling. Many will break through a key support level like the 50-day moving average (seen only on a daily chart) and 10-week moving average (weekly chart).
A quick look at the so-called FANG stocks — Facebook (FB), Amazon.com (AMZN), Netflix (NFLX) and Alphabet (GOOGL), formerly known as Google — reveal four names that aren’t seeing much in the way of institutional selling.
Among China-based growth stocks, Momo (MOMO) is threatening a break below the 10-week moving average, but several other China names are holding up well, including Sina (SINA), Weibo (WB) and JD.com (JD), just to name a few.
Two, elevated distribution-day counts for the Nasdaq and S&P 500 are usually seen ahead of market pullbacks. Just recently, the count stood at three for the Nasdaq and two for the S&P 500 (1) (please see chart). That’s not enough to cause serious problems for a market uptrend.
The distribution-day count, tracked daily in The Big Picture column, tends to rise as market conditions weaken. In most cases, a key benchmark must fall at least 0.2% in higher volume on the Nasdaq, or on the NYSE for the S&P 500, to count as a new distribution day. Stalling days, in which a major index fails to rise much amid heavy turnover, also get counted. It’s a more subtle form of institutional selling.
When the overall distribution-day count rises to say five or six, that’s usually the time to consider taking defensive measures.
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