There is an interesting pattern developing in the stock market these days. And while this pattern may be rooted in a very old-school concept - which may or may not apply to today's fast-moving, algo-driven markets - it is worth noting all the same because the implications are worrisome.
In the old days, you know, when humans made the decisions when to buy and sell stocks, analysts could study the order flow and determine whether the big boys were accumulating stocks for their portfolios or slowly distributing them. The idea here was simple. When stocks were under accumulation, there was consistent buying in the market as institutions slowly added to positions over time. And conversely, when the big boys were trying to lighten up on their equity holdings, the market displayed a pattern of slow and steady selling.
In essence, during a distribution phase the market would struggle to make any headway and all rallies were sold into. You see, when you were a pension fund manager with a boatload of stock to unload, you didn't do it all at once. No, you slowly "distributed" the positions to eager buyers over time so as to not tip your hand.
Typically, the tell-tale sign of a distribution phase would be obvious in the breadth and volume statistics. And those seeing the glass as at least half-full these days remind us that the Advance/Decline Lines and the Up-to-Down Volume indicators remain in good shape. And because of this our bovine buddies suggest that all is well and it is only a matter of time before stocks begin movin' on up again.
However, hasn't the advent and proliferation of ETFs possibly altered the effectiveness of such indicators? Isn't the fast-money using index ETFs to buy and sell baskets of stocks in less than ...
