Gains of 13.35% and 11.09% the past three months for shares of Merck & Co., Inc. (MRK) and Johnson & Johnson (JNJ) tell a story of unusual bullish trading activity accompanying the moves. The main criteria we look for when betting on upside in a stock are improving fundamentals, leading technicals and bullish trading activity in the shares. I'll go into the fundamental picture later, but the true tell on the near-term trajectory of the stock lies in the trading activity.

Beginning in August, shares of Merck and Johnson & Johnson have increased in price alongside large increases in volume. This can be indicative of smart money accumulating shares. The bottom line here is that the manner in which a stock trades can oftentimes alert you to the forward fundamental picture more so than simply looking at a company's financials alone.

For Mapsignals, the strongest indicator of positive price momentum is obtained by measuring potential institutional buying in the shares. Since August, Merck has logged 11 of these rare signals (see chart), and Johnson & Johnson has logged seven. We like to see continual bullish activity in the shares alongside solid forward fundamentals, as this indicates that demand for the stock should increase over time.

In the chart below, Merck broke out to new 52-week highs. The shares are seeing demand and should see higher levels:

Mapsignals' goal is to identify tomorrow's top stocks today. We're basically looking for outlier companies with healthy fundamentals accompanied by outsized, unusual institutional trading activity. By studying these data points, we can make an educated guess as to which equities institutions are trafficking in and marry this information with fundamentally sound companies. We want the odds on our side when looking for the highest-quality stocks.

When we decide on the strongest candidate for long-term growth, we consider many technical areas important to success. A few of these factors for Merck and Johnson & Johnson are as follows:

  • Three-month outperformance vs. SPDR S&P 500 ETF (SPY): +14.46% and +12.2%, respectively
  • Three-month outperformance vs. Health Care Select Sector SPDR ETF (XLV): +9.56% and +7.3%, respectively
  • Bullish unusual trading signals

Just to show you graphically what our unusual trading activity signal looks like, have a look at all of the UI signals made by Merck stock over the past year:

Chart showing unusual activity signals made by Merck & Co., Inc. (MRK) stock

Now, you can also see the same buying signals happening in Johnson & Johnson shares:

Chart showing unusual activity signals made by Johnson & Johnson (JNJ) stock

In the chart below, Johnson & Johnson is approaching prior yearly highs. The shares are seeing demand and should see higher levels:

On top of a great technical picture, one should also look under the hood to see if the fundamental picture supports a long-term investment. As you can see, Merck and Johnson & Johnson continue to grow:

  • Q3 2018 year-over-year (YoY) revenue growth rate: +5% and +3.6%, respectively
  • Q3 2018 YoY EPS growth rate: +7% and +7.9%, respectively
  • Years growing dividends: 8 and 40+ years, respectively

Merck and Johnson & Johnson are outperforming technically and have histories of strong fundamentals while showing bullish institutional momentum in 2018. We believe that the current levels for the shares are in position for further upside. All of this points to further long-term bullish action for the stocks.

The Bottom Line

Merck and Johnson & Johnson shares represent potential buying opportunities for the long-term investor. Given the revenue growth, increasing dividends and multiple unusual accumulation signals, these stocks could be worth a spot in an income-oriented portfolio.

To learn more about Mapsignals' institutional signals, please visit our "About Us" page.

Disclosure: The author holds a long position in Merck shares and no position in Johnson & Johnson at the time of publication.