Market timing is not about predicting the future. Rather, it’s about recognizing the signals that have proved to be reliable indicators of future stock market direction. To be successful at investing, you need to be aware of those signals and trade accordingly.
One of the main stock market topping signals is distribution. That’s when the S&P 500 or Nasdaq falls in higher volume than the prior session. It’s a sign that institutional investors are selling more than usual, and a buildup of distribution often marks a market top.
Investors also must watch for a sneaky form of distribution called stalling. That’s basically heavy volume without much price progress.
This signal happens when an index climbs but gives up the majority of its gain and closes in the lower half of the day’s price range. The index stalls out, so to speak.
There are other prerequisites for stalling days. One is that the index must rise no more than 0.4%. Second, volume must be higher than the prior day. Third, the index must have climbed at least 0.2% in one of the two previous sessions. This is to make sure the index is stalling from prior progress.
Fourth, the index must be at a new high. Some stalling instances may be short of a new high but still count. These are complicated to identify, so the best way to track stall days is to watch for them in IBD’s daily analysis of the stock market, The Big Picture.
Stalling days are easily overlooked because most investors are just happy to see another small gain in the indexes. But the savvy investor recognizes that heavy institutional selling is curbing the gain. In other words, institutions are selling into stock market strength.
The key takeaway here is that stalling days are a subtle type of distribution, even though the market doesn’t decline.
An Example From 2020 Stock Market Top
In February of 2020, right as the Covid-19 pandemic was spreading across the globe, the Nasdaq and S&P 500 remained in uptrends.
On Feb. 11, a stalling day occurred on the S&P 500, and the Nasdaq mirrored that action. The S&P 500 rose 0.2% after paring an earlier gain. Volume rose on the Nasdaq and the NYSE. By then, the Nasdaq had three distribution days and the S&P 500 four.
Stock market selling intensified, and more distribution occurred. IBD changed its market outlook to “market in correction” on Feb. 25. The S&P 500 plunged 24% from the February high to the low in March 2020.
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