While there are multiple ways to buy stocks, following what Wall Street giants are doing sure helps. IBD has a tool to track big money investors' trends.
The Accumulation/Distribution Rating is a proprietary rating that measures daily price and volume changes in institutional ownership of a stock for the prior 13 weeks.
Institutional investors include mutual funds, pension funds, hedge funds, insurance companies, educational endowments and just about anybody with massive sums to invest.
These large institutions have the power to move a stock's price either up or down with large block trades, shown in heavy volume on the stock chart. They tend to phase in (or out) of a position gradually for weeks or months, to reach their desired level. Because these major trades have a greater influence on stock prices than individual investors, tracking institutions' movements helps identify where a stock is headed.
Accumulation refers to buying of a stock by professional investors. Distribution means selling a stock.
How Accumulation/Distribution Ratings Work
In IBD's rating, stocks get an A though E rating, and may include a plus or minus sign to fine tune the rating.
A ratings represent heavy accumulation, and B ratings moderate accumulation. C ratings are neutral, with about equal amounts of buying and selling. D represents moderate distribution, and E means heavy distribution.
We are looking to buy stocks with an A or B rating, while the neutral C rating can be acceptable. Ratings of D and E should be avoided, because the heavy hitters are unloading them.
An A rating does not necessarily mean you should buy the stock, because institutions can be wrong like anyone else. But it can be one of the many factors to consider in evaluating a stock.
Review this rating frequently; it's updated daily. It can be found in several places on the IBD website including Stock Checkup and stock tables. It can also be found on MarketSmith in the left-hand side ratings box, as well as IBD Weekly, in the stock tables and mini-charts.
How To Buy Stocks Using A/D Rating
Institutional buying can be a precursor to a stock breaking out to new highs.
In early July of 2022, Li Auto had an Accumulation/Distribution Rating of A. Let's take a look at the daily chart of Li Auto at that time. The stock price gapped above the 50-day moving average May 31 after hitting a low on May 9.
The fast climb since then came with heavy volume on up days (1), which explains the high Accumulation/Distribution Rating. The stock shot up more than 40% in June and topped a buy point at 37.55 (2).
Defense Sector Gets Dumped
The aerospace and defense industry group in July 2022 was under distribution after having a big run starting around the beginning of 2022. Examples included Lockheed Martin, which had a D rating. General Dynamics dropped to an E rating, and Northrop Grumman had a D- rating.
Lockheed Martin's chart took a turn for the worse by July 1, and dropped below the 50-day moving average. The chart had two daily drops on above-average daily volume on May 31 and June 17.
The A/D rating is one of the criteria in the IBD checklist in the IBD Stock Checkup or MarketSmith that can be used to learn how to buy stocks, along with identifying the buy point on the chart. Remember, we are looking to buy stocks in a confirmed market uptrend, so when the market is under pressure as it is now, it is a riskier time to buy stocks.
This article was originally published July 1, 2022, and has been updated.
