Counting distribution days on the major market indices is how we monitor whether the big money is net selling and moving out of the market. We keep count of each day where an index closes down more than 0.2% on a pick up in volume from the previous day. We usually  start scaling out of positions when we see five or six within 25 trading days.

 

Luckily, counting distribution days isn’t the only tool we have to gauge the health of the market. There are two more indicators for determining the strength of a market uptrend:

 

1. The behavior of market leaders
2. Progress made in the portfolio

 

The reason I’m not that worried is that distribution on the New York Composite (NYC) index is only one dark spot on an otherwise good market uptrend. The NASDAQ Composite and S&P 500 index (which I use as my primary measures of market strength) have only three and four distribution days, respectively. The New York Composite has been lagging the other major indices since the beginning of the year (see below), so I’m not surprised to see the higher count on distribution days now.

 

 

More importantly, my bullishness stems from the action of the leading stocks and the stocks in my portfolio. Dozens of market leaders have been able to post 20-30% gains from their first-stage breakouts back in December. The MarketSmith Growth 250 was again full of great opportunities this weekend, as many of these leaders have begun to form and breakout from general areas of tightness and uniformity creating alternative buy points like second-stage bases or pullbacks. The number of stocks in the Growth 250 list is designed to expand and contract based on the overall condition of the market. So it’s also good to see the number of ideas available up significantly from 5 months ago.

 

But in the end, it’s always your equity that is the most telling about the strength of the market and your decisions. Profits in the portfolio should serve as reassurance you are on the right track. In our shop, a profit cushion in the portfolio is an invitation to become more aggressive and push for bigger gains. There is no truer indication of an uptrend’s strength than finding too many stocks you would like to own and not enough cash in your portfolio to buy them all.

 

Best Returns,

 

Scott O'Neil

President, MarketSmith Incorporated

Follow Scott O'Neil at Twitter.com/WScottOneil