Bearish Distribution in InvesTech’s time-tested indicator, the Negative Leadership Composite (NLC), has reemerged in a sign that there could be more trouble ahead. Following a choppy few months, major market indexes recently bounced to new highs in an incredibly concentrated rally centered around headline-driven volatility. In Friday’s issue of InvesTech Research, we stated that the NLC would be a critical indicator to watch in determining the strength and longevity of this recent market rally.
The NLC entered Distribution territory with an initial reading of -0.9 on Friday, and bearish Distribution has since moved to a reading of -4.5 today. The continued building of Distribution indicates that downside risk has begun to increase.
While the emergence of Distribution alone is not a definitive bear market confirmation, it warrants caution, and a sustained move through -50 and then -100 would be a severe warning flag. Consequently, the NLC will continue to be a vital guide over the coming weeks as the stock market searches for direction.
InvesTech’s Negative Leadership Composite (NLC), one of our key proprietary indicators, is designed to track market leadership. It is made up of two distinct components: the bullish Selling Vacuum and bearish Distribution. Bearish Distribution measures the rate of acceleration in downside leadership. When Distribution appears, it warns that the market is vulnerable to a downturn. The bullish Selling Vacuum, on the other hand, rises as downside leadership evaporates. The height and duration of the Selling Vacuum help to indicate how strong a new bull market is – and how long it will last.