Nasdaq Suffers A Distribution Day As Markets Close Lower Across The Board

May 11, 2007

Stocks started the day off weak on the back of some really poor retail same-store sales reports and couldn’t find any footing the rest of the day, as stocks slid lower all day long.

With no major M&A deals today and with earnings winding down, stocks are now reacting to economic data again. Same-store sales for WMT in April fell 3.5% from March. This was the worst monthly drop in 28 years. To top that off ANF AEO and GPS all reported same-store sales declines of 10% or more. This was clearly bad news for stocks. Take that with WFMI being the big earnings loser, losing 10%, and you have a bad day for stocks that saw today’s one day selloff wipe out a weeks worth of gains.

At the close, the SP 600 led to the downside with a 1.8% chop, the Nasdaq followed suit with a 1.7% drubbing, the NYSE fell 1.6%, the SP 500 lost 1.4%, and the DJIA held up the best, showing its leadership, with a 1.1% loss. Leading stocks did not fair well either, today, as the IBD 100 lost 2% and the IBD 85-85 lost 1.8%. It is not good to see leading stocks lead to the downside. The best case for the day would have been the IBD 100 being down .2%.

Despite the losses, today, it did not feel like institutional investors were dumping stocks left and right with no regard to price. In fact, according to the NYSE, volume came in 1% lower on that index. That is clearly a positive sign showing that funds were not busy selling. Volume would have had to have been higher.

On the Nasdaq, however, volume was higher. But it was only higher by 7% and the total amount of shares traded is lower than five days of positive closes on higher volume in March and April. Overall, it just did not have that look of funds really dumping stocks. But this is the fourth distribution day for the Nasdaq in the past four weeks. However, only two of those look like real distribution and the index is still in an intermediate term uptrend, above the 50 dma, and has a B for an acc/dist rating in IBD.

But even with the uptrend well in tact, the pattern on stocks rallying on lower volume and then having a one day selloff continues on the NYSE. On the Nasdaq that pattern has recently gave way to some real accumulation. So really there is nothing to get concerned about here. But it does show that the funds are selling shares as stocks rise.

Despite the mixed volume, the selling was very broad, with decliners beating advancers by a 3-to-1 margin on the Nasdaq and the NYSE. New 52-week highs came in much lower at 246 and new 52-week lows are close to the 100 number with 93 new lows. If you read Helene Meisler’s realmoney.com article today you could see the NYSE going back to the July and August lows and clearly see that as we make higher highs the 52-week highs contract more and more. This is very negative divergence.

Today’s selling was pretty bad but I saw people all day long calling this “the top” and saying that this will be the start of “the correction.” However, the fact that so many people are now sure that this selling is the top makes it hard to believe that this is the top. Especially with the put/call closing at .96. This shows that market players are starting to make bearish bets already on just a little bit of selling.

On top of that, the top 14 industry groups in IBD did not factor in the top 10 groups on the downside. It wasn’t until #15 that a group was in the bottom 10 for price performance today. Also most leading stocks held up well today and had normal pullbacks. There were some CANSLIM quality longs that had to be cut out of pure selling discipline–best to be safe and cut losses than be sorry and lose it all in DNDN. But overall, my CANSLIM quality longs look fine after today. It was the pure small junk in my portfolio that was played for rent, lunch, dinner, and entertainment money that had to be fully sold today.

These days are rough on the portfolio in the short-term. But in the long-term, these days setup the portfolio for potentially bigger gains down the road. Days like today separate the wheat from the chaff. Today’s selloff allows us to selloff the weak crap that at first looked good but has now failed. Instead of holding on to these stocks and possibly suffering bigger losses you also lose available capital to buy new breakouts that may come out from this pullback. So by not selling your laggards in a market like this, you actually hurt yourself twice. When the market turns around not only will you have less money for the new longs but you wont even have that money available to use to buy the new breakouts.

Could this be the start of the axiom sell in May and go away? It could be but instead of guessing I like to operate on facts. Facts that will let us know that this is a top will be if more days like today show up. Days where stocks close near their LOD, lose 1% or more, and have higher volume. Unless we get a couple of more of these showing up soon, the chances that we continue to rally will be quite good.

Some say that we are going straight up on the DJIA. All I have to say to that is take a look at the Nasdaq in 2000, the DJIA in 1929, Japan in 1990, and China now and you will see that this DJIA is no where near lofty levels. With a p/e ratio of 19x earnings, it is also hard to call it expensive here. It may be overbought, but it is not expensive. I saw somewhere today that the Nasdaq had a 200 + p/e ratio according to Motley Fool. I am not sure why I don’t remember the exact number, but I don’t. Another interesting fact is: The Nasdaq peaked with a 200+ p/e in 2000. Well everyone knows how crazy the Shanghai chart is since 2005 but the p/e ratio is only around 42x earnings. So if the Shanghai wanted to do what the Nasdaq did…..that would be stunning to say the least.

Earnings are basically wrapped up so we don’t have much to view tomorrow. But we do have the April PPI and retail sales to deal with early on. So there should be some fireworks in the market tomorrow. Aloha and I will see you in the chat room!

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