Backing and filling is what I think the S&P is beginning to do now, and will continue to do–possibly through yearend.
What is it?
I decided to Google the term before I started writing but didn’t find anyplace that has the idea right. I’m not sure why. Maybe in “modern” technical analysis (an oxymoron on a par with jumbo shrimp) people use a different term.
the basic idea has two aspects:
1. that there’s a normal or natural, relatively sedate, trend of upward progress in the stock market. For the S&P, it’s probably 8%-10% a year.
2. Sometimes, however, either the market as a whole or an individual stock will rocket upward in a very short period of time. Like what AMZN and GOOG did last month. Arguably, the S&P as a whole has done so in 2013 so far, considering that the index is up by about 25% since New Year’s Day.
When this happens, there’s a price to pay for the too-rapid movement.
The market/stock has to “digest” the gains, as they say. It does so in one of two ways.
It can tread water for a period of time, establishing a “base” for further advance by recording significant volume at around the peak levels.
Or, more frequently, it will retreat somewhat from the peak, fill in the “missing” volume at somewhat lower levels and return to the peak from there. There’s no hard and fast rule for how much the stock/market will go down during this process, but technicians typically make projections based on fractional parts of the advance. The most common ones used–on all occasions–are 1/3, 1/2 or 2/3 of the just-completed upward move.
Either is backing and filling.
I don’t know where the term comes from, but I’ve always thought of backing and filling as a construction metaphor. A bulldozer builds a pyramid of dirt. If the pile gets too high–and too pointy at the top–the dozer has to flatten out and broaden the mound before it can build it higher.
There’s also a psychological basis for backing and filling. Suppose you bought GOOG three or four weeks ago. Today you have a 20%+ gain in a very short time. So you’re tempted to take your profit and put the money to work elsewhere. That’s where the selling comes from.
The buyer? He’s the guy who regrets not purchasing the stock when you did. He probably won’t pay $1000, but $975 may look like an incredible bargain to him.
So the security involved tos and fros until the temporary selling urge is satisfied.
I’ve begun to notice this happening with the stronger performers in my portfolio. I don’t think this is a worry. It’s just the way the market works. As one of my professors used to say, “You can’t have ice cream for every course of the meal.” I have no idea why not, but that’s what he said.