In a Blog Post on September 22, I wrote: “If you are a trader, there is nothing wrong with raising some cash and waiting for more positive signs to appear.” Since then, the market has continued to see distribution (professional selling).

Last Thursday and Friday (10/2 and 10/3), the market bounced from an oversold condition and I wrote another post describing What The Bulls Need To See. Specifically, the Bulls needed the gains from Thursday/Friday to hold and to see leading stocks set up again. Unfortunately, the heavy selling returned on Monday (10/6) and again today (10/7). Overall the Nasdaq Composite has seen distribution days in 11 of the past 25 trading days. In addition, institutional option flow has completely dried up.

It is very possible that with Quantitative Easing (QE) winding down, the market is going back to its old ways. In other words, when distribution builds up, leaders breakdown, and the major indexes are below their 50-day moving averages, this usually leads to some form of a correction. Over the past 2 years, when these warning signs appeared, the market magically found a bid, which many believe was caused by QE.

Either way, a cluster of distribution days is not a healthy sign for the market. In addition, I don’t like how the market gave back most of the Thursday/Friday gain so quickly. I still recommend proceeding with caution by raising cash, reducing position size, and waiting for healthier conditions. It wouldn’t surprise me if the S&P 500 corrects down to its 200-day over the near-term (around 1900). Any bounces from here will likely be sold into and it’s worth being defensive in case this turns into a deeper correction. As always, the good news is we will have a strong uptrend when this is over, but for now, patience and discipline is key. Good luck!

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