For the past month, I have been cautious on the market for one main reason: Too much distribution. Since I first mentioned it on this blog, the institutional selling has accelerated and the Nasdaq Composite has now seen 15 distribution days in the past 31 trading sessions (since 9/3/14).

I am NOT saying a crash is coming, nor am I trying to scare people. I am simply saying that there are warnings signs in our current market that have similarities to quick declines in the past.

There are 4 warning signs that create market tops: 1) Heavy distribution, especially several days clustered in a short period of time 2) Major Indexes breaking below their 50-day moving averages 3) Leading stocks breaking down and 4) High bullish sentiment.

Here are some visual examples where we have seen clusters of distribution in the past (click on charts to expand):







I wish I could stress this point 100 times in this blog post: I am NOT saying a crash is coming. This post is mainly for educational purposes and to show some historical precedents. We could see several scenarios from here: 1) 1998, 2011 – where we see a quick 20-30% decline and we’re back at new highs in 3-6 months 2) 2008 – A 6-18 month Bear Market. I hope to God this doesn’t happen because that would ruin too many people 3) A crash-like scenario (1929, 1987). Keep in mind this has only happened twice in the last 100 years and is very rare. 4) The selling is mostly done and we are close to a low.

Either way, I am keeping an open mind and will continue to monitor the day-to-day price action. I’ve maintained a huge cash position for my clients recently, mainly because I’ve tried trading these environments in the past and I’ve been hurt by the crazy volatility (imagine that, someone on Twitter who actually admits to losing money). I recommend keeping things light until we see healthier signs. I’ll be ready to pounce again as soon as we see the selling abate and some consistent accumulation. Stay tuned!

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