Investor's Business Daily, July 5th, 2007
Your barber or next-door neighbor may have plenty of stock tips. But for the best odds of investing success, you'll want to pay attention to what the big money is doing.
Why? Mutual funds and other big players account for roughly three-quarters of the stock market's buying power. So in general you want to be buying a stock when the big money is buying it.
The up/down volume ratio is one measure investors can use to see if the big money is buying or selling.
The ratio is calculated by dividing total volume on days a stock closes higher by total volume on days the stock falls. It tracks the past 50 days, or 10 weeks, of action.
A ratio above 1.0 indicates healthy demand for shares by mutual funds and other institutional investors. A ratio below 1.0 points to weak demand.
You can find the up/down volume ratio for all stocks by using the IBD Stock Checkup at investors.com. It can also be found in Daily Graphs Online, a charting product offered by IBD's sister company.
A stock's ratio may be a little weaker than you'd like as the left side of the base forms. But that's OK. After a run-up, stocks typically need time to digest their gains.
Be wary, though, if the ratio doesn't improve as the stock nears a potential buy point. If upside trading isn't rising before a breakout, the stock has a higher risk.
Don't confuse the ratio with the Accumulation/Distribution Rating, which tracks buying and selling activity by measuring price and volume changes. The rating ranges from A to E; an A indicates heavy buying, an E, heavy selling.
Keep in mind the up/down volume ratio is only a secondary indicator. Always review fundamental and technical factors to make sure a stock has the traits of a leader.
Even if a stock boasts strong all-around ratings, it still needs a sound base to be a potential buy candidate. You should also compare up weeks and down weeks on heavy volume to gauge a base's health.
A sound base usually shows more up weeks than down weeks on above-average trade. That suggests mutual funds and other big players snapped up shares as the stock pulled back into its base and as it built the right side.
The adjacent table lists stocks priced at $15 or higher with an up/down volume ratio above 1.0, a Composite Rating of at least 95 and an Accumulation/Distribution of B or better. They also had to trade at least 300,000 shares a day and be within 15% of their 52-week high through Tuesday's close.
The results were ranked by highest up/down volume ratio. The top 25 show up on the chart.
Some, such as Baidu.com BIDU and TBS International TBSI, are extended past their proper buy points.
A few, like Deckers Outdoor DECK and SPSS SPSS, may be in or near an ideal buy range.
But don't assume these stocks are sure bets. Even if some of the stocks look good at first blush, research them thoroughly.
Keep your eye on the market, too. A downturn could easily derail a stock's advance.
