Accumulation/Distribution Rating

• What's one of the hallmarks of a great stock? That there are more buyers than sellers. Or, to be specific, that volume on the upside is greater than on the downside. In this way, you can sometimes detect buying power before a stock breaks out. Without it, you should be skeptical of the stock you're tracking. IBD's proprietary Accumulation/Distribution Rating gauges that buying power. Strong accumulation is a sign that the biggest investors -- mutual funds and other institutions -- are buying the stock. The Accumulation/Distribution Rating appears as a letter grade, just like a report card: A for heavy buying, B for moderate, C for equal weight, D for moderate selling and E for heavy selling. The system gives the greatest weight to the most-recent 13-week period. In that way, recent and current activity is emphasized, not a stock's ancient history. Either way, you want the buyers to be stepping up to the plate. It's true that for an investor to buy a stock, someone has to be selling it. But if a stock shows far more volume on days that it's rising, that's a sign that large-scale buying is taking place.

Accumulation/Distribution Rating

• Here are some things to look for. One, a rating of B or better. A C Rating is just neutral. You aren't looking for a soft simmer. You want the lid to blow off and hit the ceiling.

• Two, watch the Accumulation Rating as the stock forms its base. You want its Rating to improve as the base takes shape. After all, a base is the first good clue you will find that a stock is finding support.

• Three, the Accumulation-Distribution Rating will help you get into a stock, but is not meant to serve as a signal to get you out.

• It can help you confirm that the stock you're tracking is building a sound base with support from the big guys. But when it comes to spotting the time to sell and lock in profits, watch the stock's price-and-volume action.

Accumulation/Distribution Rating• Now let's say a highflying stock retreats to its 10-week line. That

could be a nice spot to pick up some shares of a leader. You can also wait for the stock to bounce off its 10-week line in heavy volume, or cross a prior high in brisk trade, before buying it. Before such a rebound, though, you must examine the Accumulation/Distribution Rating. Is it holding firm as the stock retreats? That's a good sign. But if the rating makes a sharp drop, that could be a warning sign. In the same way, if you're holding a stock through an ugly sell-off that leaves you uneasy, check out the Accumulation/Distribution Rating. If it falls two full notches, say, from B to D, that's a possible sell signal. It's also a good idea to set a minimum Accumulation/Distribution Rating of at least C when screening for stocks.

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Question. How do I know if institutional investors are buying or selling?