‘Distribution’ continues
It started
Tuesday on the Big Board. It continued Wednesday on the Nasdaq. And
it happened again Thursday on the Nasdaq.
It’s called “distribution,” the selling
of stock by institutional investors, something the eight-week advance off the
Oct. 28 lows hasn’t seen much of.
Although Thursday’s action didn’t nick
the Nasdaq with a fat loss, distribution prior to a market top normally occurs
as the market advances. This is
something that most investors aren’t aware of, since they focus on price at the exclusion of volume.
Does this mean it’s time to panic? No!
It generally takes time for a market to top, unlike a bottom. More than just one or
two distribution days are normally seen prior to a peak.
It’s times like these, however, that
reward an intermediate-term trader for having entered his or her positions as a
stock emerged from, or pulled back to, a base. Buying stocks that are extended
from a base might temporarily look profitable in a runaway advance. But when a
blowout runup finally cools off, the hot money that bought at extended levels
will be the first to leave the party. And that leaves numerous stocks sitting on
top of nothing but air.
Meanwhile, the disciplined trader who
entered his positions at what we might call “attractive” entry points, or just
above a base, doesn’t have as much to worry about. He can better afford to sit
through a correction without getting shaken out. This is particularly the case
with issues enjoying institutional sponsorship. Mutual funds, eager to deploy
cash in a bull market, will often step up and buy a quality name as it comes
down to a support level.
Among benchmark
tech names, Intel came under distribution for the third day,
as its intermediate trend remains south…IBM also was attacked by
institutional sellers following six days of green–I overheard someone say that “the story of the day was IBM.” Not so. The company indicated that Y2K might pressure business in Q4 and Q1, however it had already said essentially the same thing on Oct. 20. In fact, the tech sector bottomed just prior to IBM’s early-afternoon announcement…investors and the media may have seen this as THE story. But traders knew otherwise. THE topic of interest was the Nasdaq’s puny gain amid record volume.
…other bellwethers showing the most distribution included Ericsson, Texas, Tellabs, and Cisco, and to a lesser extent, Dell and Compaq.
In cyberspace, two stocks whose charts look similar,
DoubleClick and CMGI, put in wide-range days on a pick-up in
volume…Network Solutions, after pausing for all of one session on
Wednesday, started another move, though volume was unimpressive.
In all, any pullback in the big averages
would be welcomed as necessary and healthy, and would go a long way toward
lengthening the ultimate extent of this advance.