During the trading week almost any newsbreak will report the gains or losses for the Standard & Poor's 500 (S & P 500), the Dow Jones Industrial (DOW), and the NASDAQ Stock Exchange (NASD). The reason is that gauging the health of the these indices is because up to 70% of the stocks that make up these various indices will move in tandem with their movement. Also, by comparing there price action with the amount of buying and selling taking place then it can be determined if the overall market is under accumulation or distribution.



Accumulation is when investors are buying more shares than are being sold. The biggest investors in the market are the major financial institutions like big mutual funds and pension funds. When these institutions are putting tens of billions of dollar to work by buying up stocks in various companies it is reflected in the price action of the indices which are made up of these companies.

Likewise, when the market is under distribution investors are selling more than buying. When the same institutions mentioned are selling tens of billions of dollars worth of securities then it begins to affect the indices that are made up from the broad spectrum of those stocks. What results is that over several days of selling or distribution the index may begin to decline in price.

What helps to determine the accumulation of the market is volume. Volume simply measures how much buying and selling is taking place over a given time period. For example, if the price for the S & P 500, or SPX, rises over the previous day and that day's volume was greater than the previous day then for that day then the SPX was under accumulation. If there are 4 or 5 such days over a 4 to 6 week period it can result in an overall bull market rally in the SPX.

If, in the SPX, price declines lower than the previous day with greater volume than the previous day then for that day the SPX was under distribution. That means that the 500 companies that make up that index were overall being sold more than bought. If there are 4 to 5 such distribution days over a 4 to 6 week period can cause the SPX to slip into a bear market decline.

Knowing how to spot accumulation and distribution days is an invaluable way to gauge the overall market's health. It allows an investor or trader to determine whether to buy aggressively, hedge their positions with options, or get prepared for shorting opportunities.