What is Distribution?

By definition, market distribution is considered more selling than buying, usually engaged by large institutions who are fleeing the markets.  This is but one sign of a change in trend but a major signal.  When the big money is flowing - either in or out - it is important to pay attention the signs.  I'm not much of a bottom or top caller, that is not where the big money is made.  Oh sure, you can guess where the markets will turn and eventually be right, but how many times will you have been wrong before making that right call.  Even more, how much capital would you have expended looking for the turn.  Betting against the big money is usually a losing proposition.

How do we measure distribution, and what are the important characteristics?  Some would say it is just institutional selling - and technically that would be correct.  Ken Shreve, my colleague and a contributor at Real Money tells me 'when an index stages a meaningful decline and volume rises from the prior session, this is distribution.'  Further, 'as the institutional activity accounts for the vast majority of volume on the exchanges each day, the clues are evident as we see them building positions, likewise liquidating'. 

We saw early signs of distribution in September and then again in early October even as the markets were making higher levels.  A strong day followed by higher volume selling must be identified and respected.  Ken reminds us 'the Nasdaq Composite first started to show signs of distribution with higher-volume declines on Sept. 25, Sept. 28, Oct. 5, Oct. 9 and Oct. 10. That was plenty of reason for me to start getting defensive with current holdings, either by locking profits or cutting position for small losses.'

So, when will the distribution end and how will we know when to spot it?  As a technician, I look for trends and patterns in prior periods and look to results to help predict future behavior.  Trying to predict when the selling is going to finish is like trying to predict next year's Super Bowl results today - we know there will be a winner but have no idea who will be participating.  The best we can do is look for the signs, followthrough, high volume accumulation and better looking charts/technicals.  Institutions are not playing ball right now due to some political uncertainty clouding the future.  For now, it's best to sit back and wait for better conditions.  They will come.