How can selling increase the supply, when it simply changes hands? The supply does not change.
Think of BTC being held as BTC that doesn't exist in the market. The market only accounts for BTC up for sale, so there's a finite amount being sold at any given moment. If more people sell, there's more BTC available to buy, increasing supply within the market.
When you say "the market" you mean Mt.Gox, etc? The less the exchanges have vs the amount in circulation means more in individual wallets?
What confuses me, is that even the btc in Mt.Gox are in wallets...