When a stock price rallies, investors may get drawn in without taking a good look at the rally's underlying causes. One way to investigate if the price trend is legitimate is to check the stock's trading volume.
Trading volume is the number of shares or contracts that have exchanged hands in a given period, usually over a day's trading. When more activity surrounds a stock, it means more people are essentially voting on the stock's value.
When a large trading volume forms a trend, meaning if it starts to move price upwards or downwards, the trend is considered stronger and more credible than if only a few investors (weak trading volumes) are determining the change.
Other bullish trends
We decided to screen a universe of companies experiencing higher than normal trading volumes with those that have are trading at a 52-week high. A stock approaching a 52-week high presents an interesting opportunity because it's just when the stock starts gaining traction that other investors take notice.
Additionally, we screened for companies with net positive institutional buying in the current quarter. Institutions, like hedge funds, tend to have more access to market research than the average investor -- one of the reasons they are often refereed to as "smart money" investors. Therefore, if "smart money" expresses strong interest in a company, investors can assume they have good reason for doing so.
Business section: Investing ideas
As a final note on high volume trading with momentum stocks: If prices are moving upwards, and volume is increasing simultaneously, it indicates investors feel the stock has more to price in. When a stock is in an uptrend but trading volume is declining, it's a sign the trend is losing its momentum.
For that reason, in creating the list below we started with companies recently experiencing a daily trading volume more than 2 times the average daily trading volume over the last two months.
The smart money thinks these momentum stocks have more value to cash in -- do you agree? (Click here to access free, interactive tools to analyze these ideas.)
1. Independent Bank
2. Douglas Emmett
3. Liberty Property Trust
4. Idenix Pharmaceuticals
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above.
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