Imagine you’re sitting at a bar in Manhattan.
As the bartender’s making your drink, you overhear a conversation from the table behind you.
Two well-dressed men are talking. One looks familiar. He’s a hedge fund manager you’ve seen on TV.
They’re talking excitedly about one stock… and how they bought $1 billion worth of it today. By the end of the week, they plan to buy several billion more.
What would you do if you overheard this?
You’d be smart to buy that stock first thing the next morning.
After all, hedge funds are what’s known as “smart money.” They’re among the world’s smartest and most sophisticated investors. More important, they control a lot of money. When they concentrate billions on one stock, that stock will often shoot to the moon.
Unfortunately, the chances of overhearing a conversation like this are slim to none. But there is a reliable way to know what stocks hedge funds are buying.
Today, I’ll show you a unique way to “front-run” hedge funds…
Master this “tool,” and you’ll be able to consistently buy stocks just before the smart money pushes them 50%, 75%, or 100% higher.
To be clear, I’m not talking about reading SEC filings like “13Fs.” As you may know, big hedge funds are required to disclose the stocks they’re buying and selling on a quarterly basis in 13Fs.
Anyone can read 13Fs online. Many rookie traders try to use them to “read the tea leaves” on what hedge funds are buying.
Problem is, by the time a 13F is released, the information in it is “stale.” It tells you what the hedge fund did in the last three months.
To profit from this information, you need to know what hedge funds are buying now.
That’s why you should pay close attention to trading volume…
Trading volume measures how many shares of a stock trade hands over a given period.
For a trader like me, volume is easily the most important indicator after price… because it clues me in to when hedge funds are quietly loading up on a stock.
You see, hedge funds don’t invest like you or I do. Remember, they often control billions of dollars. So when they’re investing in a company, they won’t buy millions of shares all at once. Instead, they’ll “scale in” to a stock over weeks or months.
They do this for two reasons: to prevent the price from spiking… and to hide their actions from others who would front-run them.
Hedge funds go to great lengths to hide their tracks…
But they can’t hide volume.
Huge volume is a telltale sign that hedge funds and other big institutions are buying a stock. But remember, they want to be discreet. So, you’re not going to see a 1,000% volume spike.
Instead, look for noticeable increases. I’m talking 10%, 20%, or 50% above normal trading volume. This sort of rising volume often lets me know that “someone big” is buying the stock.
And remember, these surges in trading volume are not a secret.
Anyone can see them by pulling up a basic chart.
In January 2020, I recommended fast-moving stock CrowdStrike (NASDAQ:CRWD) to my readers.
CrowdStrike is one of the world’s leading cybersecurity companies. It focuses on protecting files saved to the “cloud.”
Look at the vertical bars at the bottom:
In late 2019, I noticed an unusual uptick in volume. You can clearly see this in the blue box above. This told me the smart money was building a position in CrowdStrike.
(It was later reported the buyer was none other than hedge fund billionaire Steven Cohen.)
Shares took a downturn in March 2020 due to the coronavirus meltdown. But as you can see, they recovered in a flash… and shot to new highs by June.
By buying shares in explosive stocks when the smart money leaves its “footprints,” we can position ourselves before the masses pile in.
I use this tool all the time. Another example is 10X Genomics (NASDAQ:TXG)…
I recommended TXG in June 2020, saying at the time: “Heavy volume has been pouring into the stock since the broad market bottomed in March, which is another sign of strong institutional demand.”
Shares took off shortly after, and we booked a 107% gain in 14 months.
In short: Don’t ignore those vertical bars…
They’ll clue you into what the smart money is really doing…
And let you ride the wave higher… before it becomes big news.
This post appeared at ValueWalk.com. It was contributed by Justin Spittler – Chief Trader, RiskHedge.