Trending Stocks: What Are They and How Do You Spot Them?
There is some confusion around the concept of “trending stocks,” because the term can mean different things in different contexts. So the first thing we need to clarify is what we mean when we use that phrase.
Often people use the term “trending stocks” to refer to stocks that are moving in a generally upward or downward direction over a certain period of time. When a stock is moving upward, we can say it’s trending up. When it’s moving downward, we can say it’s trending down.
Sometimes the phrase is actually referring to stocks with heavy trading volume. This means the stocks are “hot” in the sense that a lot of people are buying and selling them, with many shares currently in motion.
The term is also used to refer to any stock that’s being heavily discussed in the financial media. For example, this week there has been intense coverage of the Snowflake IPO. The media buzz is likely to stir up lots of conversations around the water cooler or on Slack about the stock in question.
So how can an investor identify trending stocks? And once they do, is it a good idea to invest in them? Let’s take a closer look.
How to Identify Trending Stocks
The way to identify trending stocks depends on which type of trend you’re talking about. Let’s look at each type in turn.
1. Identifying Upward and Downward Trends
When a stock is trending upward, you can see the price of the stock moving in a generally positive direction over a period of time. The opposite is true for downward trends. In this case, you see the prices dropping, on the whole, over time.
One way to identify a trending stock is to use the “bottom-up method.” In order to do this, you’ll need to examine lists of stocks that are hitting 52-week highs or lows. Pick the stock from this list that you’re interested in examining and begin to look at its historical data. Choose a time period that you’re interested in looking at, such as several days, months or even years.
The resulting chart pattern should give you a pretty solid idea of whether a stock is trending – and in which direction it is trending. Generally, the slope of the curve will be up if the stock is trending higher over time. It will be down if the stock is trending lower over time.
Another method you can use is the “top-down” metric. This technique involves starting with an industry rather than an individual stock. For example, you may want to see if stock prices in the tech industry or prices on durable goods stocks are trending in a general direction over time. Once you see if the overall industry is trending, you can then drill down to individual stocks to see which might be trending themselves.
2. Identifying Heavily Traded Stocks
As I mentioned above, another type of trending stock is one that has an unusually high trading volume. This trading, of course, could be pushing the price higher or lower – or keeping it stable – depending on how bullish or bearish people happen to be.
There are different factors that can cause heavy trading volume with a particular security. For example, if there is good news about a company, people may be quick to buy up shares, which can drive the price of the stock up. The opposite can happen if bad news about the company comes out.
Many financial websites have screeners that allow you to look at the highest-volume stocks in a given time period. For example, you can look at Yahoo Finance to determine the highest-volume stocks on a given day.
3. Stocks With Heavy Media Buzz
The third type of trending stock is one that is getting heavy media buzz. As I mentioned before, Snowflake (NYSE: SNOW) has been getting a lot of buzz this week due to its IPO. Snowflake’s new stock soared from its offering price of $120 to – briefly – $319 before settling back down closer to $200. It closed yesterday at $227.54.
Everywhere you turned this week, you probably heard discussion of Snowflake. Cable news, business radio, and major financial media sites like CNBC and Fox Business all had a tremendous amount of coverage of the Snowflake IPO. Of course, this helped drive both heavy trading volume and big price movements up and down.
The more media buzz a stock gets, the more it tends to drive the conversation among investors. People get curious and want to get in on the action. This can help turn the stock into a trend in the other senses we’ve already discussed. It can spur heavy trading and drive price movements.
Should You Buy Trending Stocks?
Generally, whether you should buy trending stocks should be determined on a case-by-case basis. Every situation is different, and you need to do the research on whether a stock is expected to move higher in the future.
You shouldn’t buy a stock just because it’s getting a lot of buzz. You’ll need to do deeper research to understand both the fundamentals of the company’s financials and whether the stock is likely to move – and in which direction – over a future period of time.
To help you do so, I recommend signing up for the Profit Trends e-letter, a free publication where stock guru and Chief Trends Expert Matthew Carr delivers his insights on all the hottest trending stocks. You can sign up for Profit Trends in the sign-up box below.
About Brian M. Reiser
Brian M. Reiser has a Bachelor of Science degree in Management with a concentration in finance from the School of Management at Binghamton University.
He also holds a B.A. in philosophy from Columbia University and an M.A. in philosophy from the University of South Florida.
His primary interests at Investment U include personal finance, debt, tech stocks and more.