Vulcan Point Island in the Philippines is the real-world example of that old parable about a “riddle wrapped in a mystery inside an enigma.”
This well-known tourist attraction is an island … inside a lake … inside an island … inside a lake … inside an island.
That deep-in-the-center island (red arrow) is akin to the bullseye center on a big dart board.
But if you were just dropped onto that island blindfolded, you’d open your eyes and have absolutely zero sense of the “world around you.”
Here’s what you’d miss ….
When buying and selling stocks, focusing only on individual stock prices to analyze the health, trends, and opportunities is very much like being dropped – blindfolded – onto Vulcan Point Island. You see only what’s right in front of you.
You miss a lot of important context.
That mistake can blind you to real wealth opportunities and expose you to ruinous losses.
But if you reorient yourself – include more data to see that bigger picture – you emerge with a different view. A better view.
And one way to do that is to analyze one key number that way too many investors overlook.
One of the Secrets of My Investing Success
Over-focusing on stock prices ignores other key factors, including one every investor should track – trading volume.
Volume – the number of shares traded over a defined stretch – is a crucial element of market analysis. You can find it on virtually every stock or index quote, but that makes it easy to gloss right over.
And the fact that volume is so easy to miss is partly why it doesn’t get nearly enough attention.
Certainly not on financial news outlets like CNBC.
During recent months when stocks were getting hit, you could see, hear, and even feel the fear the “talking heads” were experiencing.
I was much more sanguine than those TV commentators (and acid-reflux free) for one simple reason: I wasn’t plunked down on that “center island,” out of touch with the world around me.
I could see that “big picture” for stocks.
As a reminder, one piece of that big picture is Big Money, which we talked about in our last Power Trends issue. Big Money – the millions and millions of dollars invested by institutions and hedge funds – has been buying. And these fund managers are buying smaller stocks in growth sectors. They’re not seeking shelter; they’re seeking profits.
Another key part of that big picture is volume, and it’s one of the secrets behind my quantitative system and my own investing success.
Let’s see what it tells us right now.
We’ll do that by analyzing January volume on the Invesco QQQ Trust (QQQ), an ETF that tracks the Nasdaq 100. “The Qs” (as it’s called) had a great month, surging 9%.
Digging into the volume shows us this strength is not a house of cards that could come tumbling down at any minute. This rally looks real, and it looks likely to continue. Consider…
- Five of 19 trading days in January had above-average volume. All five were up days.
- The average gain on those days was a chunky 1.9%. (That’s basically the 9% move right there.)
- Volume those five days was a robust 9.6% above average.
- 31% of the entire month’s volume was on just those five days.
January continued a trend I’ve been telling my readers about for a few months now. Despite the daily ups and downs, occasional whipsaws, and scary headlines, volume on up days has regularly exceeded volume on down days.
To me, this is further confirmation that investors are ready to put money to work, stocks are ready to move up, and the pros are already investing huge sums of money.
Using It To Our Advantage
Tracking volume is a big part of what I do every day (but not the only thing!) for my institutional clients and in my Quantum Edge Pro service. In particular, I focus on detecting unusual volume – specifically what the Big Money is buying and selling and how we, as individual investors, can make money in those stocks.
A deeper analysis through my quant system not only confirms more buying than selling, but it illustrates how big the difference is.
My system retrieves and analyzes tons of data every day the market is open, and I’ve written algorithms to sniff out unusually big buys and sells. These are not average buys and sells, but the huge trades that tell us some fund or institution is either loading up on a stock or dumping a stock.
When there is unusually heavy buying or selling – unusual even for funds managing billions of dollars – we get a signal.
Over the last three months, nearly three out of every four signals have been buys – 73% to be exact. The light blue bars on the chart below are the buys, and the red bars are sells. There’s way more blue in that chart than red, and the you can see the corresponding surge in the QQQ in the darker shaded section.
You can see the massive spike in buying just the last few days. In fact, that’s the most buy signals I’ve seen since June 2020.
Do you remember what happened next?
Over the next 12 months, the S&P 500 gained nearly 40%, and the Nasdaq shot up more than 45%.
For much of 2022, the huge volume days were selling days that drove stocks lower. But that started to shift in the fourth quarter. Buying picked up and selling faded. Now we see lots of buying and hardly any selling.
That’s a much more complete picture than just prices on a few stocks, and it strengthens my already bullish expectations for 2023.
Surface-level analysis can’t match deeper analysis. We need multiple data points from multiple sources; we need a way to bring all it together into something we can use to our advantage. That’s why I developed my Big Money Index for the overall market.
It’s also why I developed a Quantum Score rating for individual stocks. My system weeds out all of the noise and homes in on stocks with superior fundamental and technical strength that Big Money is buying.
Very few stocks rate a Quantum Score high enough to make them buys – fewer than 1% of all publicly traded stocks. It’s a very select group, a tiny speck on the stock market map like Vulcan Point Island.
Except we weren’t dropped there blindfolded. We know the big picture, and that’s how we get there in the first place – investing in the best of the best with the highest probability of making good money.
Editor, Jason Bodner’s Power Trends
P.S. Even with Big Money mostly buying, there are still stocks out there with languishing fundamentals, weak technicals, and a lack of institutional support. In my latest special reportfor Power Trends readers, I highlight 15 big companies that Big Money has been avoiding. You may want to as well. Click here to read Portfolio Killers: The 15 Toxic Blue-Chip Stocks to Sell Today.