One of the most popular sayings you'll hear in Investing 101 is, 'Volume leads price', and rightfully so, this statement has a lot of truth to it. Often times institutions, hedge funds, or large groups of retail investors will begin buying shares of a company that they have some belief will rise in price. Sometimes there will be an abundance in supply of the shares however, and the initial buying surge won't cause an immediate rise in price. Nonetheless, as the market adjusts, whether it be though continued buying pressure, or a lack of supply in shares at the next-nearby price levels, the stock will rise.
The key to exploiting these situations is identifying these pre-price volume surges. The laws of statistics give us an extremely straightforward and simple way to do this.
Standard deviation (STD) tells how much an occurrence of a certain value varies from its mean value. For a stock price, its price change STD tells us how much price changes vary around its mean value, usually zero. For volume it tells us how much the volume changes from day to day, around its average volume.
However, the most important thing STD tells us is the CHANCE of that value occurring. Most statisticians, and scientists concur that any value that lies 2 STDs away from the mean is a SIGNIFICANT CHANGE. Mathematically, a value only lies 2 standard deviations away from the mean < 3% of the time, quite a rarity!
We can use this information to tell us which stocks are showing unusual volume surges, those that are 2 STDs above the average, or in the + 97th percentile. Unfortunately, most stocks with these rare volume surges have already risen/fallen in price. The key is to add another restriction, only looking at stocks that have less than a 1 STD change in price, a perfectly normal price change.
Below are 10 stock currently showing this abnormal increase in volume, but not yet in price. I have calculated them over 5 day moving averages to smooth it out. I can make no promises that institutional investors are buying, or that the price will rise 100%, but they make for interesting cases you should at lease look at.
Symbol Volume STDs above normal Price STDs above normal
SNBC 18.0386 0.0461
PZZI 9.758 0.2315
OVRL 9.2366 0.7816
PSMT 8.7327 -0.5465
HBHC 8.0493 0.7592
HA 7.0763 -0.7769
GPOR 6.9729 0.3764
EEI 6.9287 0.6595
PLAB 6.348 -0.5453
WTSLA 6.3226 -0.1031
(Note: I will be adding a listing of the top 5 abnormal volume - normal price stocks to the daily BAT Computer report.)
(Note2: These measurements assume Gaussian statistics for stock price movements, a better approximation is a Levy skew distribution, which complicates things and is somewhat unnecessary for this case.)
