"How To Spot Market Tops" - When the "big boys" (institutional investors like mutual funds, banks, pension funds, insurance companies, etc) head for the exits, you need to as well.
They control an estimated 80% of the price action of the US stock market, so it pays to know what they are doing. Since they are so big, they leave tracks behind. By keeping a close watch on the markets you can step aside and not have to "ride" the markets down during their "gut-wrenching" declines of 15%, 25%, 50% and more.
The best way to gauge if the institutional players are exiting the market is to watch what for we call "distribution days." Simply, this is when one of the major indexes ( the NASDAQ, S&P 500, Dow Industrials, NYSE Composite) is down more than .2% on heavier volume than the previous session.
Not all indexes have to fall at the same time. If only one of the gauges suffers heavy distribution that still can signal trouble ahead.
When the market racks up four of five of these in a few weeks time, chances are the rally is in trouble and the market may reverse lower.
Above is a chart of the NASDAQ in 2000 as it peaked on March 10th and then started it's massive decline. The first day of heavy distribution came 3 sessions prior to the peak. The index fell for several sessions putting in another distribution day, then tried to rally back.
That rally stalled in late March and then the NASDAQ racked-up three days of heavy distribution in a row. A definite signal to exit the markets. The index also sliced through it's 50 day moving average on heavy volume, another major sell signal.
The NASDAQ put in a total of 9 distribution days in a month's time. During all this, scores of market "pundits" were telling investors to "buy the dips." Many individuals who did not heed the real warning signs lost a lot of money and those who stayed on margin were most likely wiped out. This ended up being one of the biggest collapses in Wall St. history.
Don't panic if the market flashes a few distribution days from time to time. The market can't go higher without taking an occasional breather now and then. It's when they pile up in a very short time that you need to worry.
Also, not every distribution day should cause you concern. Higher volume selling after a holiday usually means that more people are now back after a quiet pre-holiday period.
"Churning" near the top is also a sign of distribution. This is when the market is not advancing near the top but the volume is brisk. This means that there is a lot of institutional trading going on, but the buyers' demand is not strong enough to push prices up.
When you see heavy distribution in the markets you must act quickly. If you are on margin, get off! Sell your weaker acting stocks. If selling persists, raise cash to protect your hard earned assets. Don't listen to the experts, listen to the markets.
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