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The S Factor Can Help Gauge A Stock's True Supply Situation

History's greatest stocks ride a supply and demand story.

If the demand for shares far exceeds the supply, the share price will rise, often to sustained gains.

This is why the S for Supply is a part of CAN SLIM. Let's look at six ways the S factor can help define a stock's true situation.

No. 1. An overwhelming supply makes big moves hard to create. "It's hard to budge the price of a stock that has 5 billion shares outstanding because the supply is so large," IBD founder and Chairman William J. O'Neil wrote in "How to Make Money in Stocks.

The table at the right shows how true the observation is. The 14 stocks are the stocks in IBD's database with a float of 5 billion shares or more. How many have been market leaders in the past decade? Only one, Apple (AAPL).

No. 2. The composition of the supply also matters. Companies in which CEOs have a significant stake do better than those in which CEOs have no skin in the game.

Executives who have no skin in the game are like politicians: It's easy to do dumb things with other people's money. Exposure adds pressure, and even a sharp mind runs a little sharper when the risks are personal.

No. 3. Excessive stock splits affect supply. Some people believe splits help fuel gains because they make the stock seem affordable. IBD research doesn't support that notion. "Our study of the biggest winners found that only 18% of them had splits in the year preceding their great price advances," O'Neil wrote in "How to Make Money in Stocks.

No. 4. Secondary offerings can work in a stock's favor — provided the cash goes to the company and is used for something dynamic. However, if the secondary offering is designed to help management dump shares, then that can hurt a stock and sometimes dilute shares by increasing the float.

Michael Kors (KORS) announced secondary offerings in March 2012, September 2012 and February 2013. Corrections from the closing price on the day of the announced offering were 28% over three months, 17% over two months and 20% over two months.

No. 5. Corporate buybacks can shrink the supply of traded shares, creating a bullish balance between supply and demand. Buybacks also boost earnings per share and can even drive the market higher.

Research from Ed Yardeni of Yardeni Research and Jeffrey Kleintop of LPL Financial note buybacks as the chief driver of the bull run that began in 2009.

No. 6. Trading volume remains the investor's most timely clue to supply. Learning how to read charts is a crucial skill.