Investor's Corner: Use IBD 100 To Find Potential Leaders

• Vincent Mao
• On 6:56 pm EST, Tuesday November 3, 2009

With the market in correction, it's an ideal time to search for stocks that could lead the next uptrend. A good place to start is the IBD 100.

The IBD 100 is a computer-generated list of the top-ranked stocks. Most are leaders in their respective industries, if not the overall market.

This proprietary screen takes into account factors such as a stock's recent earnings growth and price performance.

The list is revised each Friday after the market close and is published in Monday's IBD. You can get the list on Friday night through eIBD. On eTables, more data are provided for each stock. (For pricing on eTables, visit investors.com/store.)

IBD 100 stocks are screened for the characteristics that have separated history's biggest market winners. But while the IBD 100 will show you companies with those traits, you shouldn't treat it as a buy or recommendation list.

Even if a stock is in the top 10, it's not an automatic buy. True, the IBD 100 filters the entire market for the most desirable traits.

You must still do your own research.

Read about the company's strategy, markets and competition. Study its financials as much as possible. Especially in weak markets, some stocks with questionable fundamentals can make it onto the list.

Check for sponsorship, i.e., whether any top-performing mutual funds own the stock.

Use the IBD 100 to spot leaders on the horizon. If you like what you see, you can add the stock to your watch list.

Whether you use the print edition or eIBD, the IBD 100 mini charts will show you a stock's IBD ratings and key vitals.

At the bottom of each chart, there's a short analysis of key price and volume action. This is one of the most useful features of the IBD 100 because it tells you what shape the stock is in, technically speaking.

If a stock is forming a sound base, IBD market writers will point 20 out.

If a stock is flashing red flags, the analysis can alert you to that. The analyses can tell you if a stock is extended. You should not chase stocks that are more than 5% past a proper buy point.

Some charts will be encased by a black border. These "boxed" stocks have superior fundamentals and are near buy points or forming sound bases. You should pay particular attention to these.

Depending on market conditions, there may be few or no boxed stocks. When the market is in correction, that's not the time to be buying stocks. Therefore, no charts will be boxed.

You can also use the IBD 100 as a gauge of market strength. In healthy markets, a certain number of top-ranked stocks will be at the forefront of the rally. When the major indexes climb, these leaders should be participating in the rally.

When you see leaders get hammered or start to lag the general averages, watch out -- the end of the market uptrend may be near.

Another bad sign is when leaders' breakouts fail. Before the market went into its correction, the major indexes notched a pile of distribution days.

Most leaders were holding up. But on Oct. 27, an all-out assault on leading stocks was evidence that a correction was under way.

On that day, Carter's (NYSE:CRI - News) cratered 24%. Fuqi International (NasdaqGM:FUQI - News) and Home Inns & Hotels Management (NasdaqGS:HMIN - News) tumbled 14% each. Baidu (NasdaqGS:BIDU - News) shed 11%. Many a stock sliced its 50-day moving average.

Buzz up!