A good watchlist of stock market leaders isn't just a collection of potential stocks to buy in bullish uptrends — it's a useful tool to monitor where the market is trending.
Monitoring the performance of market leaders can indicate to investors where risk might be rising and help determine the difference between a healthy market and a risky one.
"You don't want to just key in on the two or three (leading stocks) that you bought," Don Vandenbord, chief investment officer at Revere Asset Management, told Investor's Business Daily's "Investing with IBD" podcast. "What about the 21 that are in your total leaders list? How are they working?"
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Finding And Adding Market Leaders
The market leaders that should be added into a watchlist include stocks that are consistently above their moving averages and showing stronger gains that beat market indexes. While strong stocks are consistently above the 21-day moving average, "the strongest stocks trend up along the eight-day exponential moving average," Vandenbord said.
Also making the cut: Stocks that stand out even as the market sinks. Netflix and Palantir are examples of stocks that held up despite the market's sharp downturn in the spring.
Netflix stock on April 17 broke out of a double-bottom base, according to IBD's MarketSurge charting platform. That was several trading days before IBD identified a significant turn in the market with a follow-through day on April 22.
The relative strength line for Netflix stock was hitting new highs as the stock broke out, underscoring its outperformance during a weak market. Shares are now roughly 28% above that double-bottom buy point.
Palantir stock cleared an entry point just shy of 100 on April 23, one day after the follow-through day. Its relative strength line also was trending sharply higher as the AI software company outperformed the S&P 500 off the market's lows in April.
Shares are up 23% from a cup-with-handle buy point of 125.25, which Palantir cleared in mid-May.
Market Leaders: Growth Or Defensive?
Considering the composition of stocks that end up making the list is also important. A leader list that's made up of staples and utility stocks could indicate the overall market environment is unhealthy, with investors recoiling from riskier, growth sectors.
In a bullish uptrend, a list of leading stocks should be comprised of top growth names with exceptional earnings and sales growth.
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