If you want to get anywhere, you're going to need fuel. Humans need to eat, cars need gasoline, and stocks need institutional investors.
"It takes big demand to push up prices, and by far the biggest source of demand for stocks is institutional investors," IBD founder William O'Neil wrote in "How to Make Money in Stocks."
With a few exceptions, the individual investor simply lacks the buying power it takes to drive a stock into new high ground. When big investors such as mutual funds, banks and insurance companies start buying, you can see it in the trading volume.
The Accumulation/Distribution Rating is one of IBD's SmartSelect Ratings. The A/D Rating measures the amount of institutional buying and selling in a stock over the past three months. Using a proprietary formula, stocks are rated on an A+ to E scale. A+ means heavy institutional buying; E indicates heavy institutional selling. Naturally, heavy-volume up days help the rating, while heavy-volume down days hurt it.
How To Invest: Proving Strength With The Ratio
The up/down volume ratio is another good way to identify winning stocks under accumulation. The ratio covers 50 days of trading. It divides the total volume on up days by total volume on down days to get the ratio. Look for stocks with ratios above 1.0. A ratio above 1.0 points to heavier demand, or more buying, while a ratio below 1.0 suggests more selling.
Like the Accumulation/Distribution Rating, heavy-volume gains and low-volume declines help improve the up/down volume ratio. Heavy-volume declines and low-volume gains will hurt the ratio.
The up/down volume ratio is available in the Technical Performance section of IBD Stock Checkup at Investors.com. The ratio is also found in MarketSmith weekly charts and on IBD Leaderboard charts.
How To Invest: Top Stocks Demand The Best
The accompanying table from August 2023 shows several leading stocks with high up/down volume ratios.
Last August, ANI Pharmaceuticals cleared a five-week flat base following its Q2 earnings report. In the days leading up to Wednesday's breakout, the up/down ratio was growing and showed no signs of slowing down: 2.5, 2.9 and 3.2. The top ranked stock in the generic drugs industry group, ANI gained 9% with nearly triple the average daily volume on the breakout.
Golub Capital BDC had been trading tightly since April 2023. Two separate three-weeks-tight patterns meant the stock was coiled and ready to pounce. Strong second-quarter results and an up/down volume ratio of 2.9 put the stock 3.5% above the 52-week high in early August 2023.
Celsius Holdings made a huge move Aug. 9, 2023, on the company's Q2 earnings. Up more than 20% in a single day, Celsius gapped up. Its up/down volume ratio was 1.4 even before the breakout. It was an impressive gain after already hitting the 20% to 25% profit-taking target zone from a May 2023 breakout.
This article was originally published Aug. 11, 2023, and has been updated.
