A $20 million trade changed everything.
I was heading a trading desk at Cantor Fitzgerald, the blue-chip New York investment bank, matching institutional buyers with sellers when my phone rang. My friend, who managed money at another big bank, wanted shares of a stock for one of his heavyweight clients.
Within just a few minutes I was able to find 100,000 shares – about $2 million worth. But that wasn’t enough. He wanted more.
I went back to work making phone call after phone call and was ultimately able to sell one million shares – worth $20 million – by the end of the day.
And the next day, the same thing. He needed more – another million shares.
It continued for several weeks, as I watched the stock price soar each time this client bought more shares – ultimately leading to a 70% increase.
Those weeks transformed my view of investing. From my unique vantage point heading up a trading desk, I saw firsthand how this type of buying moved stocks. And it put me on a mission – one that culminated in the quantitative analytics system I developed and still use today.
On Monday, we went over the first step in picking money-making stocks: analyzing the most important fundamentals. Today, I’ll give you an inside look at the next steps to building your wealth by finding superior companies to invest in.
Those stocks like the one I sold to my friend over 15 years ago.
Step 2: Look for Stocks That Are Trending
Companies with strong fundamentals are great, but even their stocks can get stuck in the mud. The best buys are in healthy companies whose stocks are trending higher.
We measure this through the technicals.
This is not technical analysis as you may think of it. This technical data I analyze gives us critical insights into a stock’s price movements and trading characteristics.
I look at many metrics to determine how strongly a stock is trading and if money is flowing in. Not every stock I recommend has every single metric in its favor (that’s rare, and not necessary to make good money), but these are some of the top technicals to look for:
- A sudden price spike. Specifically, one on above average volume (money coming in), and unusually high volatility (someone is changing the picture).
- Trading near interim highs. I look at three-month highs.
- Trading near 52-week highs. Money flowing in means more new highs are likely.
- Solid institutional support. This is the money that moves stocks and accounts for 70% to 90% of daily trading volume.
- Stacked moving averages. A moving average gives us a smooth picture of a price trend over time. I look at three different time frames – 50 days, 100 days, and 200 days. The ideal setup if when these moving averages are trending higher and stacked 50 over 100, and 100 over 200. that indicates a strong upward trend likely to continue.
- Strong relative performance to other stocks in its sector. This is leadership. The strongest stocks in a sector tend to lift the entire sector. Instead of playing catchup, it’s better to focus on the leaders from the get go.
Multiple inputs go into this analysis, but they can be summarized as price movement and volume trends. These two metrics give us a picture of supply and demand.
If there’s a big appetite for anything – a cool new service, a must-have product, a breakthrough innovation, even a hot stock – and the supply holds steady, then the price has only one way to go: up.
The next step to really drill down to the absolute best potential buys is a bit more difficult to do on your own. But it’s absolutely critical.
Step 3: Watch the All-Important Money Flows
By “money” I mean Big Money inflows. Simply put, the biggest investors on the planet put massive sums of money to work. This is the money that moves stocks.
As I mentioned above, studies show that 70% to 90% of trading volume every day is institutional money.
Without it, any stock’s odds of making you money immediately decrease.
When big professional investors plow a bunch of money into a stock, it has an impact… no matter how big or small the stock is. I’ve seen it countless times. It’s not always visible at first, but my decades in the business gave me a trained eye.
Very few investors pay attention to these Big Money flows because very few investors know how to smoke out what the pros are doing. Fund managers try their absolute best to keep their buying and selling quiet.
That’s why this third step is so difficult. Everything is done behind closed doors.
If institutional buys and sells became instant public knowledge, prices of the underlying stocks would move so fast that these players would be chasing their own trades higher and higher.
Thanks to my unique vantage point, I learned the “clues” to look for – the signals that Big Money investors were buying or selling shares at unusually high rates.
I’m happy to help you in this, but if you want to look on your own, keep these two pillars in mind: a rising price trend on above average volume.
If a stock meets our technical criteria and has strong fundamentals, money flows are the last piece of the puzzle. When we get all three, we’re talking about a rare stock with the highest probability of making us good money.
Putting It All Together
I don’t use super top-secret data. The information above will help whittle down a list of thousands of stocks to a relative handful of potential winners. Every algorithm I wrote for my Quantum Edge system is based on publicly available end-of-day data, so you have access to the same data I do.
Here’s the catch. (There’s always a catch, right?) The tricky part is figuring out how to weed through this massive data quickly and easily.
It can all be overwhelming and time consuming. It’s an exercise in patience and persistence to filter through thousands of stocks manually each day, get a pool of potential buys, and then look up all those stats I’ve included in these criteria.
I’m here to tell you, though, that if you follow those steps, you will eliminate thousands of stocks and be able to focus on the highest potential winners.
If this all sounds like a headache, you can let me and my Quantum Edge system do the work for you. Click here to learn how you can start receiving my stock recommendations by joining TradeSmith Investment Report.
I’ll be back with Part 3 next week where we put it all together to form one incredibly powerful tool: the Quantum Score.
Talk soon,
Jason Bodner
Editor, Jason Bodner’s Power Trends
