Stocks rallied after Tuesday’s weaker than expected jobs report cemented the belief that the Fed will not taper in 2013. The buying enthusiasm waned within the first hour after a slew of leading growth stocks turned negative. The most vicious move was NFLX. The stock gapped up over $30 but closed down $32.47 and fell nearly $70 from today’s high to today’s low. The media wanted you to believe that the decline was due to negative comments from the CEO, but after the bell, Carl Icahn (who has a large position in the stock) tweeted: “Sold block of NFLX today. Wish to thank Reed Hastings, Ted Sarandos, NFLX team, and last but not least Kevin Spacey:” We now know the decline was due to large institutional selling, not comments from the CEO. It will be very interesting to see how the stock acts in the near future.
From our point of view, the market is very over-bought in the short term and due for a nice pullback to shake out the weak/late hands. In addition, the S&P 500 (SPX) soared over 110 points in the last 10 trading days and is very extended above nearly all its important moving averages.
And now an interview with Adam…
Jim: Thanks for joining us, Adam. Fresh from a CBS radio interview!
Adam: My Pleasure
Jim: Today I wanted to ask you on behalf of our readers, many of them new to trading, about distribution and accumulation, how we can spot it and what it means. Firstly, what actually is distribution and accumulation?
Adam: Accumulation and distribution are one of the best ways to gauge what large institutions are doing in the market.
Jim: So they refer to what’s really going on on the inside of Wall Street, perhaps invisibly, so their activity goes unnoticed?
Adam: We are not privy to their activity but carefully studying accumulation and distribution patterns shows us where they are deploying their capital
Jim: So accumulation refers to large investors buying surreptitiously, and distribution refers to surreptitious selling?
Jim: And why do they want/need to hide their activity like this?
Adam: There are many reasons why they need to hide their activity but the most common is competition. They don’t want their competitors to know what they are doing
Jim: Competitors who might ramp up the price out of their buying range?
Adam: Yes. Think about it- if you are in their position, managing billions of dollars would you want anyone to know what you are doing? Buying or selling?
Jim: So if we can find a way to spot and ride on this subversive activity, it could be very lucrative?
Adam: Absolutely! That is exactly why studying accumulation and distribution is so powerful, because there is no way they can hide.
Jim: So despite all their efforts we can spot what they’re doing. How?
Adam: Few ways but the most obvious is to study volume patterns of your stocks and the overall market each day. I call them volume signatures… up or down, when you look for them it is a great “tell” on what the institutions are doing.
First look at the day’s PRICE action.
Then look at the volume behind the move.
Keep in mind there are only 4 possible scenarios for any stock or market:
1. UP on above average volume
2. Up on light volume
3. Down on heavy volume
4. Down on light volume
Let’s look at each one separately:
1. Up on heavy volume: Most bullish scenario because that shows large institutions are aggressively buying (accumulating) stock
2. Up on light volume- in most cases that is healthy because the price moved higher and you do not need to see heavy volume on every up day
3. Down on heavy volume: Clear sign of institutional distribution (selling)
4. Down on light volume- somewhat healthy in an up market because it shows there are not a lot of heavy sellers
Jim: Can you point to a recent situation where this was obvious?
Adam: Sure- take a look at Facebook (FB). Since July 25 (their last earnings report) the stock has had several explosive volume signatures. You can also see strong accumulation (over the past few months) in: AIG, AMZN, LNKD, AAPL, YELP, FLT, YY, among others. Key is to look for an unusual spike in volume, up or down, for subtle, yet important, clues on what the large investors are doing.