Tracking The Stock Market Trend For Long-Term Investment Success

The stock market trend is the most important rule of buying stocks since IBD’s studies show that three out of four stocks follow the market direction. That means you always want to stay in sync with the overall market.

Buying stocks during a market uptrend greatly improve your chances of being right. But if you buy as the market indexes are turning lower or in a downtrend, the odds shift, increasing your risk and the likelihood of being wrong.

Unlike market bottoms, which can be identified by a follow-through day, market tops typically occur over a number of weeks, as institutional investors shift from buying mode into selling mode. The most effective way to track institutional selling is with distribution days over the past 25 trading sessions.

A distribution day is when the Nasdaq composite or S&P 500 closes down 0.2% or more in volume heavier than the prior day.

Of course, one day of selling doesn’t indicate a shift in trend. But if you start to see a series of distribution days within several weeks, that is cause for concern. It’s an indication that mutual fund managers and other institutional investors are starting to shift their thinking and sell more aggressively.

Another bearish sign is the clustering of distribution, when a number of distribution days occur in a short period of time.

How Stall Days Impact The Stock Market Trend

Stalling involves a day of rising volume (or within 95% of the previous day’s trade) without much price progress. That means there is selling while the market is still going up.

In most cases, a stall day involves a small gain and a close that is in the lower half of the daily range. IBD’s stall-day model is complicated and proprietary, so the best way to track stall days is to watch for them in IBD’s daily analysis of the stock market, The Big Picture.

In the current stock market, there were three stalling sessions on the S&P 500 in the month of October: Oct. 3 (Point 1), on Oct. 28 (Point 2) and Oct. 31 (Point 3). Those were days that started out strong, but failed to achieve convincing closes.

Removing Distribution Days

IBD’s research has determined that investors shouldn’t count distribution days after 25 trading days have passed. At that point, those days of have become irrelevant to the current stock market action.

A distribution day also falls out of an index’s count after the index climbs 5% above that distribution day’s close. IBD has developed this rule on the premise that when an index rallies and extends itself from a distribution day, it’s showing the strength to overcome high-volume selling.

IBD’s Stock Market Exposure Model

To help investors stay in sync with the stock market trend, IBD developed a model that has five different levels centered on market exposure that equate to the percentage of your investing portfolio that’s invested in stocks.

Through Wednesday’s close, the recommended exposure level was 80%-100%, as the stock market set record highs in recent weeks. But investors should always remain on the lookout for signs of a change in direction.

Check out IBD’s Big Picture for daily market analysis, along with an updated exposure level.

Be sure to follow Scott Lehtonen on X at @IBD_SLehtonen for more on how to buy stocks, the Dow Jones Industrial Average and the stock market today.

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