When you're trolling for great stocks, what are you looking for? Great sales and earnings growth, a great story and all the rest. But it's also crucial to find the stocks that the big funds have targeted for their own portfolios. After all, their research is almost surely better — and their buying power is certainly more powerful — than yours.
Window Into Funds If you want a window into what funds are buying, you should understand what the up-down volume ratio is.
It's a metric derived by dividing a stock's volume on up days by its volume on down days during the past 50 days.
A ratio greater than 1.0 shows more volume on the upside than on the downside. A reading under 1.0 shows sellers have the upper hand.
When you see a gauge of broad volume trends like the up-down volume ratio, what are you really looking at? The footprints of the investment funds that dominate the market.
Exposing Funds' Moves Remember, fund managers don't like to advertise their actions.
If they buy $10 million worth of a stock, they probably have $190 million worth of buy orders still unfilled. Do they want the market to know that, and start a stampede for the stock
Certainly not. But try as they might, even the quietest goliath is still a giant, and he'll leave huge footprints — like the up-down volume ratio.
So where can you find a stock's up-down volume ratio? Use the Stock Checkup at Investors.com. Scroll down to Technical performance and there it is. MarketSmith subscribers can find it on weekly charts, on the data box.
The up-down volume ratio bears some resemblance to the Accumulation-Distribution Rating. This is another tracker of funds' impact on individual stocks. It also uses volume, but is a more complex indicator of institutional demand for a stock.
One-Two Punch The trick is to spot the one-two punch of a strong up-down volume ratio and a shining Accumulation-Distribution Rating.
A stock with strong readings in both gauges would help confirm there are institutional investors buying its shares.
These indicators are especially important to watch as you're studying a base or a breakout. You want to see evidence of institutional demand at these crucial points in a chart.
The Accumulation-Distribution Rating goes on a scale of A+ for the best to E for the worst stocks.
It is found in the IBD Smart NYSE + Nasdaq Tables, mini-charts of various IBD features, at the Stock Checkup online and other resources.