July 6, 2022

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How To Trade Growth Stocks: This IBD Rating Tells You What Stocks The Funds Are Buying Heavily

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If demand is the food for stock price appreciation, there’s no larger source of food than institutional investors. Follow what they’re feeding, and you’ve got an edge in picking the best growth stocks.




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The bulk of trading in the stock market is conducted by pension funds, university endowments, insurance companies, hedge funds and other major investors with billions to spend. In short, they control most of the market. Once they like a stock, they’ll spend weeks, months or even years building a large position, causing the share price to climb.

The problem is that institutions don’t publicize their investment decisions. Oh sure, they may say they like techs, health care or this or that, but they tend to be tight-lipped about specific holdings. Mutual funds disclose their holdings usually once a quarter. By the time you see their reports, they may be entirely out of a stock.

But small investors have a backhanded way to tell if institutions are buying or selling a stock. How? When a stock’s price suddenly climbs sharply in unusually heavy volume, that’s the footprint of an institutional investor buying shares. When prices drop in heavy trade, institutions are selling.

The Accumulation/Distribution Rating

There’s no easier way to measure the balance of institutional selling and buying than IBD’s Accumulation/Distribution Rating. Crunching price-and-volume data over the past few months, the rating tells you if a stock is under accumulation or under distribution.

Stocks with greatest accumulation have A ratings; B ratings also indicate heavy net buying. Letter grades of D or E show net selling and generally should be avoided. Ratings of C are neutral and are acceptable for investment purposes. Each letter has plus and minus grades also, which help refine the grading scale a bit.

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How To Use The Rating

It’s especially important to check the Accumulation grade when you are researching a stock and studying the quality of its base. Institutional buying tends to appear in bases before stocks break out to new highs. TransUnion (TRU) scored A and B ratings in nearly all of the 57 days it spent basing in late January to April 20, 2017, when it soared to a new high of 67.32.

Gains in heavy volume the weeks ended Feb. 16, March 9 and March 16 were evidence of major fund buying while the base took shape. The breakout took TransUnion as high as 75.99 before the next base started.

Also, check the rating if a stock has been making new highs but suddenly starts stalling. A weakening rating can alert investors of a top in progress.

Like any rating, there’s always a lag if the stock sees abrupt changes. For example, on May 9, 2017, Nvidia (NVDA) had lowly D- Accumulation rating. One day later, the chip company went to a C- when Nvidia shot up 18% in heavy volume to a new high.

On the flip side, Facebook (FB) was at new highs and gleaming with an A grade on July 25. That same evening, however, the company’s earnings report spooked investors and shares plummeted 19% the next day.

Where To Find It

You can quickly find the Accumulation/Distribution Rating for virtually any stock at IBD’s website, namely in the stock quotes and Stock Checkup. Various data tables also include the rating. In the IBD Weekly print newspaper, it is found in the stock tables, plus it’s in the mini-charts for IBD 50, Stock Spotlight, Sector Leaders and IPO Leaders. Ratings are updated overnight.

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A version of this column was first published on Oct. 26, 2018. 

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