| Ken's Response: |
November 8, 2010 |
Dear Ernie,
Thanks for writing in. I searched and did not easily find any of the old Q&A with members on this subject, so this must be a good time to discuss the minimum volume that a stock should have.
Technically, buyable breakouts under this investment system should have at least +150% of their daily average volume when rising above the pivot point to trigger a proper buy signal. Usually the biggest winners traded many times their daily average volume when they had just begun their great rallies.
Liquidity can be a concern for investors, especially large investors or institutional investors who by themselves can influence the market considerably with their orders to buy or sell - termed "slippage" by the industry professionals. The total outstanding shares (S criteria) obviously has great bearing on the supply/demand scenarios that develop.
Some pundits have suggested that the institutional crowd avoids stocks that lack liquidity and, for example, those stocks that may trade less than 100,000 on an average day. This may very well be true, however the institutional crowd will not forever turn a blind eye to "illiquid" companies that are producing strong earnings. Typically they accumulate their large-sized positions in such companies over time. One of your primary advantages as an individual investors is that you can usually move more quickly in or out, reacting swiftly based on signs of institutional activity.
We should not dismiss an ideal candidate which is thinly traded, but emphasize that such examples call for extra discipline so as to avoid chasing them extended from a sound base, and always limit losses at -7% if the stock drops more than that much from your purchase price.
In fact, on this subject, the biggest of all past winners identified at CANSLIM.net since 1996, Hansen Natural Corp (HANS), was trading less than 20,000 shares per day when it was first featured, prior to rallying 59-fold. (Review the original write-up here.)
One of the currently Featured Stocks, Ebix, Inc (EBIX) has average volume around 641,600 shares per day now, and it has 35 million shares outstanding. See the latest detailed analysis we published on 9/24/10 under the headline "Big Weekly Gain And Breakout For High-Ranked Computer Software Firm"
Note that there have been two 3:1 stock splits, one in Oct '08 and another in Jan '10, since EBIX was first featured back in March 2008 under the headline "Thinly Traded Issue Has Characteristics Of Many Great Winners." Back then, its average volume was not even 5,000 shares per day.
We did receive a few complaints about stocks including EBIX and HANS in the past which were then thinly traded. Specifically, investors were concerned that they lacked liquidity when first identified. Of course, we have seen that a lack of liquidity can work to your great advantage when you latch on early to an ideal candidate with all of the key investment criteria met. In thinly traded stocks, investors should be extra careful to adhere to the rules and be especially disciplined so as to avoid chasing them extended from a sound base, while also always limiting losses at -7% if the stock drops more than that much from your purchase price.
Best regards,
Kenneth J. Gruneisen
Founder & Contributing Writer for CANSLIM.net
www.canslim.net |
