If you want to get anywhere, you're going to need fuel. Humans need to eat, cars need gasoline, and stocks need institutional investors.
Looking for breakouts on above average volume, at least 40%, is the easiest way to check for institutional support. But institutional investors do not purchase all their shares in one sitting. To give their portfolios the exposure they want, they will spread the buying across multiple days and weeks. In this way, they avoid driving up the price too high too quickly. So how do we track down and measure this drawn out spending?
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 MarketSurge weekly charts and on IBD Leaderboard charts.
How To Invest: Top Stocks Demand The Best
The accompanying table from January 2025 shows several leading stocks with high up/down volume ratios.
At the end of last July, F5 jumped 12% on earnings. As strong as this move was, it was still within 5% of the 16-week cup buy point of 196.35. Shares held the 21-day line for five weeks creating a flat base. By Sept. 12, the day before the breakout, F5 held an up/down volume ratio of 2.5. Shares popped 2.1% the next day and began running, culminating in 20% gains just after Q3 earnings came out.
Carpenter Technology had a good 2024. In the last 12 months, shares have run up over 220%. Investors could have nabbed some of these gains for themselves in mid-July. Shares of the specialty metals manufacturer and distributor consolidated after Q3 earnings reported in May. A little over two weeks before Q4 earnings were delivered, Carpenter broke out at 112.75. It had an up/down volume ratio of 1.9 the day before it began to run 32% in just three weeks.
Spotify Technology started 2024 with a bang. On Jan. 11, 2024, Spotify had an up/down volume ratio of 1.9 before breaking out of a five-week flat base. More-cautious investors could have waited until Jan. 24 to buy their shares. Spotify stock was still within the 5% buy zone and had a ratio of 2.1. Shares ran up 50% before they ever crossed below the 21-day line.
This article was originally published Aug. 11, 2023, and has been updated.
