What It Is:
A bellwether is a security or indicator that signals the market’s direction.
 
How It Works/Example:
Let’s assume XYZ Company is an auto manufacturer. If XYZ Company stock typically falls before the rest of the automotive sector falls or rises before the rest of the automotive sector rises, we could consider XYZ Company a bellwether of the auto industry.
 
A security’s bellwether status changes over time, but in the equities markets the largest, most well-established companies in an industry are often the bellwethers (the 20-year Treasury bond is considered a bond bellwether). Usually profitable and stable, most have a solid competitive position, established customer bases, and brand loyalty. Some have even proven to be exceptionally resilient during weak economic times. These stocks also form the foundation of most major market indices; large-cap bellwethers dominate the Dow Jones Industrials, the S&P 500 and the Nasdaq Composite.
 
Why It Matters:
There is a connection between bellwether status and institutional ownership. Bellwether stocks often have large institutional ownership, and institutions often have tremendous influence on stock prices. But because most mutual funds engage in some form of indexing, most commonly by benchmarking against the S&P 500, those investors who don’t own bellwether stocks directly probably still have exposure to them through their mutual fund holdings.
 
Although bellwether stocks may signal things to come, they are not always the most attractive investments in their sectors. By the time a company reaches bellwether status, its market-beating growth days are usually well behind it and its enormous size makes meaningful expansion difficult to come by. Instead, investors may consider using bellwether stocks as indicators but investing in up-and-coming bellwethers that still have plenty of growth potential ahead of them.

Income Security of the Month If you're looking for high yields, monthly payments and unprecedented safety from your investments, then you need to learn more about our "Income Security of the Month" for November 2008. This stable preferred stock has a long track record of paying some of the most solid dividends in Wall Street history. In fact, the preferred issue pays a monthly dividend totaling 10.3% annually and has outperformed the S&P 500 by more than +44 percentage points over the last year!

Top 10 Stocks for 2008! Since we began publishing this report back in 2003, the picks we've featured have consistently beaten the broader market -- delivering average gains of +21.3% per year and outperforming the S&P by a nearly 2-to-1 margin. Act now to reserve your copy of our newest report -- Top Ten Stocks for 2008.