While on any given day, stocks may tumble or surge as marginal buyers send increasingly illiquid indices lower or higher on ever lower volume, a more important question is what is taking place below the surface: are large holders looking to offload large exposure (by selling), or vice versa.
For the answer we go to Bank of America, which has models to measure precisely this.
The first one, the Volume Intensity Model (VIM), measures short-term accumulation (up volume or buying) vs. distribution (down volume or selling). According to BofA, VIM remains negative across the board since distribution crossed above accumulation in mid-Nov. Accumulation remains low and has reflected a “buyers’ strike”.
Of all indices, the selling is most pronounced among tech-heavy names, with distribution in the NASDAQ highest since Sept. 2011; NYSE distribution is highest since Oct. 2014 with similar extremes on the S&P 500 and Russell 2000.
As BofA's Stephen Suttemeir notes, this is tactical oversold reading similar to the Williams %R and VXV/VIX ratio. However, he adds that "any near-term oversold bounce as a "sell strength" rally as bullish "mean-reverters" take temporary control from more bearish "trend followers". He concludes that "weight of the evidence supports the trend followers."
For the response on longer-term accumulation (up volume or buying) relative to distribution (down volume or selling), we refer to BofA's VIGOR model. A rising VIGOR shows net accumulation, which is bullish. A falling VIGOR shows net distribution, which is bearish. More from BofA:
VIGOR broke below the October 2015 and October 2014 lows on S&P 500 to complete a top. Meanwhile, VIGOR has held the breakdowns on Russell 2000 and NYSE and continues to weaken. The risk is that NASDAQ Comp will follow with a sustained move below the Oct. 2015 low to complete a top as well. Weak VIGOR suggests a sell strength environment.
So while it is clear that as of this moment distribution is clearly overpowering accumulation, one final follow up is which sectors are seeing the biggest in and outflows. One way to gauge the sector rotation is to use relative strength and relative momentum, which is tracked by the relative rotation graph (RRG). The weekly RRG shows Telecom, Utilities and Staples as leadership; Tech, Industrials and Discretionary as weakening; and Financials, Materials and Energy as lagging. Health Care is improving and closing in on the leadership quadrant. The RRG reflects a defensive or risk off market. Tech and Discretionary have been big leadership groups (think FANG), but are only weakening and have not yet shifted to lagging sectors.