How To Uncover Institutional Buying

One of the best ways to find stocks on the move that are grabbing the attention of investors is to screen for stocks with increasing volume. This is because increased volume shows investor interest. As more investors buy the stock, the stock's price should go higher. But the individual investor, while important to the market, doesn't really have the firepower to affect volume the way that big institutional investors do.

And very few things can move a stock more than institutional buying. Why is that?

For one, institutions have the ability of buying tens of millions of dollars worth of a stock and even hundreds of millions of dollars. And because their purchases are often so large, it typically takes weeks, if not months, for an institutional investor to build a position.

Given this commitment, considering it will also take several weeks or months to get out, you can be sure that these institutional investors have done plenty of homework to feel good about the fundamental prospects of the company.

This does not mean you can ignore your own analysis or the stock market as a whole. But screening for stocks with rising volume (along with prices of course) can put some fantastic stocks on your radar screen.

What Kind of Volume Increase to Look For

I prefer to search for at least two weeks of increasing volume along with rising prices. And in my testing I have found that 3 weeks performs even better.

One week volume spikes, however, will not get thru, as oftentimes those can be driven by one day events. Instead, it's the successive volume increase that shows true buying demand, giving this set-up its value.

The volume increase also doesn't have to be huge. We're not talking about a several hundred percent increase. In fact, often those massive increases prove to be turning points.

What we're looking for are noticeable increases, like 10%, 20% or 50% increases, etc. But nothing outrageous, like a 10 fold increase. Remember, the last thing an institutional investor wants to do is call too much attention while he or she is in the midst of building a position. But if you know what to look for, you can see all of this happening in plain sight. And get in for the ride as they flesh out the rest of their position.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short ...

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