(List compiled by Andrew Dominguez and Danny Guttridge. Data sourced from Finviz.)
In any market, price is determined by two factors: supply and demand. Simply, price increases as supply decreases and/or demand increases, and vice-versa. Price movements in the stock market, therefore, should be highly correlated to supply and demand.
So how can you measure supply and demand?
Let’s begin with supply: mostly, it can be thought of as the share float, or the number of publicly available shares for the company. This number fluctuates over time, but it is much less volatile than demand shifts.
One example of a supply shift would be a stock buyback where a company buys its own shares, reducing the supply of public shares, and theoretically driving up the price of each remaining share.
Now, on to demand. This can be trickier to measure because demand is as much as psychological phenomenon as it is a quantitative one. But in the stock market, one of the basic proxies for demand is the volume of trades.
The logic is simple – a high volume means more people are buying shares of a stock, which means demand for those shares is stronger than usual. And strong demand should lead to higher prices.
By the same token, weak volume should indicate weak demand, which should in turn lead to lower prices.
So, when prices increase but volume is weak, a warning flag is raised. History has shown that these increases on weak volume can often be a sign of an impending fall.
This might be the situation we find ourselves in today, according to a technical analysis by Kevin Marder of MarketWatch.
“… the Nasdaq has only recorded one major accumulation day since the mid-June low. A major accumulation day occurs when price rises at least 0.3% on volume that is both above average and at least 3% more than that of the prior day. This is an objective measure of institutional demand for stock,” writes Marder.
Marder adds that he paid attention to the “glaringly weak volume” in the October 2007, an event that rightfully unnerved him and heralded the beginning of the financial crisis.
So, where can you find stocks that are trading higher with conviction (i.e. bullish supply/demand trends)? To help you kick start your own research, here is a list of stocks that have recently reached new highs on strong volume. For each stock we’ll list the relative volume indicator, which expresses Friday’s trading volume as a multiple of the three month average.
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List sorted by relative volume.
1. MedcoHealth Solutions Inc. (MHS): Drugs Wholesale with a market cap of $25.52B. Relative volume at 19.91. It provides clinically-driven pharmacy services designed for private and public employers, health plans, labour unions and government agencies of all sizes, and for individuals served by Medicare Part D Prescription Drug Plans.
2. InterDigital, Inc. (IDCC): Wireless Communications with a market cap of $3.37B. Relative volume at 11.30. It is engaged in technology research and development activities or in the prosecution, maintenance, enforcement, and licensing of patents. It has designed and developed a range of products that are used in digital cellular and wireless products and networks, including second generation (2G), third generation (3G), fourth generation (4G) and Institute of Electrical and Electronic Engineers (IEEE) 802-related products and networks.
3. Berkshire Hills Bancorp Inc. (BHLB): Savings & Loans with a market cap of $329.38M. Relative volume at 9.58. It is a holding company for Berkshire Bank and Berkshire Insurance Group, an independent insurance agency in Western Massachusetts. It operates a total of 45 financial centres, including 40 bank branches, as well as insurance offices including 40 full-service banking offices serving communities throughout Western Massachusetts, Northeastern New York and in Southern Vermont.
4. Texas Capital BancShares Inc. (TCBI): Southwest Regional Banks with a market cap of $1.08B. Relative volume at 6.13. It provides commercial banking services to its customers in Texas and concentrates on middle market commercial and high-net-worth customers.
5. Oncothyreon Inc (ONTY): Biotechnology with a market cap of $421.41M. Relative volume at 4.13. It is a clinical-stage biopharmaceutical company. It focuses primarily on the development of therapeutic products for the treatment of cancer.
6. Acacia Research Corporation (ACTG): Research Services with a market cap of $1.78B. Relative volume at 3.93. It acquires, develops, licenses and enforces patented technologies. As of December 31, 2010, its operating subsidiaries owned or controlled the rights to over 171 patent portfolios, which include the United States patents and foreign counterparts covering technologies used in a range of industries, including Aligned Wafer Bonding, Audio Communications Fraud Detection, Audio Storage and Retrieval System, Audio Video Enhancement & synchronisation, Biosensor, Camera Support, Database Access, Facilities Operation Management System and Gemstone Grading.
7. Cal-Maine Foods, Inc. (CALM): Farm Products with a market cap of $848.82M. Relative volume at 3.59. It is a producer and marketer of shell eggs in the United States. During the fiscal year ended May 29, 2010 (fiscal 2010), the Company sold approximately 805 million dozen shell eggs.
8. SXC Health Solutions, Corp. (SXCI): Application Software with a market cap of $4.01B. Relative volume at 3.46. It is a provider of pharmacy benefit management (PBM) services and healthcare information technology (HCIT) solutions. Its customers include pharmacy benefit managers, managed care organisations, self-insured employer groups, unions, third-party health care plan administrators, and state and federal government entities.
9. Penn National Gaming Inc. (PENN): Resorts & Casinos with a market cap of $3.43B. Relative volume at 3.24. It is a diversified, multi-jurisdictional owner and manager of gaming and pari-mutuel properties. It owns Hollywood Casino Bay St. Louis and Boomtown Biloxi, CRC Holdings, Inc., the Bullwhackers properties, Hollywood Casino Corporation, Argosy Gaming Company, Black Gold Casino at Zia Park, and Sanford-Orlando Kennel Club), greenfield projects (such as at Hollywood Casino at Penn National Race Course and Hollywood Slots Hotel and Raceway, and Hollywood Casino Perryville.
Interactive Chart: Press Play to see how analyst ratings have changed for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.