Distribution in the stock market refers to the increased selling of stock by large institutions. Distribution is indicated by one or more of the major market indexes closing down more than 0.2% on increased volume from the previous day.
Our studies have shown that four to six days of distribution over a period of four or five weeks are often enough to turn a previously advancing market into decline. Therefore, once you notice these signs of distribution, it is best to hold off on any further stock purchases, and perhaps even cut back on some of your positions, especially if you are on margin.
Distribution days lose relevance over time and can be discounted as they age beyond 25 trading sessions, or when the market shows significant gains since the distribution day.