Gavekal Capital: Investors are Transitioning from Accumulating Stocks to Distributing Stocks

Wednesday, May 21, 2014

Investors are Transitioning from Accumulating Stocks to Distributing Stocks

One of the ways in which we can measure whether investors are in general accumulating stocks (bullish) or distributing stocks (bearish) is to track the number of days of skewed market breadth in either direction. Days we would consider to have skewed market breadth would simply be those in which advancing stocks outnumber declining stocks by a wide margin, or vise verse.

In the chart below we track the running total number of days over the last three months in which we observe stock accumulation (advancing stocks outnumbering declining stocks by at least 4:1) and subtract the number of days in which we observe stock distribution (declining stocks outnumbering advancing stocks by at least 4:1). In this way we obtain a net number of days of stock accumulation, with any number below zero indicating stock distribution over the preceding three months. Since we are plotting a running total, the direction of the trend (whether the red line is rising or falling) is just as important as the level.

When we plot our Accumulation/Distribution Indicator for the MSCI World Index (red line, right axis) against the price in USD of the MSCI World Index (blue line, left axis) we observe that generally the Accumulation/Distribution Indicator leads at important market peaks and is coincident with market troughs. This is important because 1) our indicator has been falling since last December while the market has been rising and 2) our indicator is also in negative territory, indicating that we are in a phase of distribution rather than accumulation.

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