I have heard that it is best to look for stocks with an average volume of 500K before investing in them. I often see stocks on the report with a lower average volume. Is there a reason? (August 16, 2004)
There is an idea circulating that a stocks has to have 500K average volume in order to 'safely' invest in the stock. The idea stems from a desire to avoid getting whipsawed if selling starts; it takes fewer sellers to change the direction of a stocks with lower daily average volume.
We basically use a 100K average daily volume as a minimum level. Why? Because institutions typically use this level as a cutoff point as well for stocks they will consider. They want to be able to accumulate shares slowly and quietly, and a 100K average is pretty much the minimum.
One of the things you will notice about a lot of stocks we like to follow are market leaders, i.e., stocks that are showing strong earnings and sales growth and are also in position to break higher, free and clear of any overhead resistance. This is not always the case for the plays, but we do prefer these. If you eliminate all stocks with an average volume less than 500K, you are effectively eliminating some of the up and comers that are market leaders and can truly make staggering runs in a bull run. We love new issues that have formed their first base. Often these stocks are not trading at a 500K daily volume clip, but they have the potential to post excellent returns for us. It is fact that newer issues tend to outperform the rest of the market once they go through their first base. We don't like to eliminate those from the equation.
Indeed, these stocks can go from low volume to high average volume once the rest of the market 'discovers' them. Moreover, we are not typically buying stocks as they languish in the bottom of a base where a big order on our part would alter the price. We are looking for others to start buying the stock, pushing that volume to a breakout level. That shows us there is great demand for the stock by the very ones we want to follow, the institutions that control most of the money and can really make a stock take off. We want to see this volume when we move in because it shows us the big money is buying and it allows us to buy without inflating the price. Stocks can look ready to move, but until they do make the break on volume they could languish at that level or break lower. We want to see the move and see it on volume. When we see good accumulation and then a strong breakout, we don't fret too much over stocks with 100K or better average volume.
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