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If you follow biotech… the markets… the news in general – you likely heard this news last week.
Last Tuesday, the U.S. Patent Trial and Appeal Board agreed to review a challenge to a patent for anti-inflammatory rheumatoid arthritis treatment Humira. That's the top product for Big Pharma leader AbbVie Inc. (NYSE: ABBV) – and was the second-best-selling drug in the United States last year.
Here's the "headline" that ran almost everywhere I looked shortly after this news dropped: Shares of AbbVie dropped a precipitous 4.7%.
I noticed that, too.
But as someone who's analyzed the biopharmaceutical industry and the stock market for more than 30 years, something else really stood out for me.
You might call it "the real news"…
While AbbVie stock was sinking, more than 35 million shares changed hands. That was four times the average volume AbbVie had seen over the previous 50 days.
Today I'll explain why all those shares trading hands – not the 4.7% drop – is "the real news" here.
And I'll show you three investing tips to become a more successful investor… to become richer… over the long haul.
Turn It Up
That huge amount of volume on Tuesday tells me that more declines are likely to come as Wall Street bails on AbbVie. And now I can use that knowledge to help me decide what to do with AbbVie… whether that's to sell, buy more, or stay put.
You see, to become a successful investor, you need to learn how to keep an eye on not just a stock's price, but also its volume.
Volume – here we're talking about the number of shares traded in a stock on a given day – or the lack of it often means the difference between success and financial disaster.
That's why, during my years spent watching and investing in technology, I've made keeping an eye on volume a part of my daily routine. For instance, on my trading platform, I have a column that gives me the volume buzz on every stock on my radar screen.
With that, I can get an instant look at how the market is "voting" on each stock. That's key, because it tells me how much conviction there is behind any move – up or down.
Indeed, I often send out breaking-news alerts to members of my trading services when one of our picks is way up in price. And because volume is a big part of those stories – it helps tell me whether we can expect those rallies to continue – I always explain the volume we're seeing in the move.
To illustrate what I'm talking about, let's take a look at two examples that occurred just in the last week… starting with my premium service, Radical Technology Profits.
On Wednesday, one of our recent "Buys" soared just shy of 25%. Like I've been saying, that's just the first part of the story. Here's the rest: Shares of this cutting-edge medical tech firm saw volume that was nearly eight times that of its 50-day average. With that many shares trading hands, it shows me that investors believe strongly that this growth firm still has huge upside ahead.
Something very similar occurred May 13 with a chip firm that we hold in Nova-X Report. Shares of this stock jumped more than 15% on volume that beat the 50-day average by nearly fivefold.
Both of these cases point to an indicator that most professional investors use. It's called "gap up with momentum."
When a stock "gaps up with momentum," it isn't just up in price for the day. It likely means the stock has broken out to a higher trading range – and that bodes well for even more profits.
As these cases make clear, volume is a key factor I keep in mind as I look for winning plays. You can use it, too.
With that in mind, here are three volume moneymakers to watch… and that you can use to add "oomph" to your portfolio…
Volume Moneymaker No. 1: Liquidity
I can't emphasize this enough. To succeed over the long haul, you have to buy stocks and exchange-traded funds (ETFs) with a healthy amount of shares trading hands.
In a nutshell, how much volume you see in a given investment tells you how easily you can get out. That's key, because if either that stock or the market corrects quickly, you need to be able to sell so you can limit your losses or lock in your profits.
Think of it this way. If a stock doesn't have enough average volume on a daily basis, you may not be able to sell it – at any price.
When you invest in thinly traded stocks, you are basically throwing out portfolio management tools. For that reason, I rarely suggest buying any stock or ETF with less than 50,000 shares trading hands daily – and that low a level is only for high-risk trades and a small fraction of your investment kitty.
I usually prefer to see much more volume than even that, because I may need to close the position quickly to capture profits or to keep a small loss from becoming a huge one.
Volume Moneymaker No. 2: The Power of the Trend
It's easy to look at a stock that's moving up and get excited. There's some money, you're thinking…
But how do you know just how strong the buying power behind it is?
Volume gives you a great clue. Ideally, you want to see that a rising stock has higher volume on winning days than on losing ones.
The reason is simple. If the volume is higher on "up" days, the bulls are in firmly in control. If the stock dips too much, they step in to buy on the pullback, giving it a lot of support.
Not only that, but a rising stock riding higher volume is a great signal that institutional buyers, like hedge funds and pension funds, are moving in. Such big buyers can't make their intended purchase all at once, because doing so would send the stock's price through the roof. Instead, they make steady purchases along the way, often for several weeks at a time.
So, if you get in early enough, you'll be able to ride this "institutional buyer" trend for a while. And you will have enough volume behind you to set your trailing stop and sleep soundly, knowing your order will fill and your portfolio is safe.
Volume Moneymaker No. 3: The Power of the Pros
The Wall Street investors, hedge funds, and others who can move the markets always use trading volume as one of their key indicators.
If you don't build that into your stock-picking process, you are giving the big boys their unfair advantages. You're leaving money on the table.
So, now that you've added volume to your investor's toolbox – you know to check volume as part of your stock-picking process – you know that if you're just looking at just the price action, you're really seeing only half the picture.
Just to review… here's what'll happen once you start paying more attention to volume:
- You'll know what the pros are doing.
- You'll know just how much momentum the stock really has.
- You'll be "buying portfolio insurance," because you'll know you can get out quickly if events turn against you.
- And you'll greatly increase your odds of building meaningful wealth over the long haul.
Start using it today.
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About the Author
Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.