Leading the market is a term used to describe the movement of the value of a given stock or group of stocks that moves in advance of the market overall. Typically, this term is applied to situations in which the price per share of a given stock begins to decline shortly before the market as a whole begins to exhibit the same pattern. There are those who also see leading the market as a positive sign, since a given stock may begin to experience an increase in value just before the market as a whole climbs out of a slump and begins to move upward again.
There are no set criteria for determining when a stock can be said to be leading the market. Some analysts consider this type of movement to occur when a well-known stock issue undergoes a change of 20% or more within a relatively short period of time, with the market beginning to shift in a direction similar to that stock. Others hold that the stock must continue to move in advance of the market, effectively maintaining a consistent lead on the increase or decrease of similar stocks in an identified sector of a market, or the market overall.
Often, leading the market is a phenomenon that is associated with what is known as a bear market. This type of market is one that has entered into a period in which securities prices are falling and investors exhibit a high level of pessimism about the future of the market. This often prompts investors to begin selling securities at an accelerated pace, hoping to minimize their losses now rather than sustain larger losses as prices continue to decline. From this perspective, leading the market can be considered a bad omen that foreshadows changes in the marketplace that investors will find unfavorable.
At the same time, the type of advance movement of the stock may in fact be positive rather than negative. Since the broad understanding of leading the market is that the security moves in a given direction before the rest of the market follows suit, a stock that increases in value during a bear market may in fact be foreshadowing the return of a bull market where stock prices in general begin to rebound. For this reason, it is often important to clarify whether the advance movement involves a decline in the price of the security under consideration, or whether the security price is on the rise. Doing so makes it easier to then evaluate the market as a whole and determine if the price movement is likely to be accompanied by a general shift in the overall market that moves in the same direction.