5-11-15 Comments

[Mike]

Watch lists are updated.

IBD has the market in correction. One of the unique features of the MarketSchool model is the Power Trend. Once a rally has the NASDAQ lows above the 21-day for 10 consecutive days and the 21-day is above a rising 50-day for at least 5 consecutive days the Power Trend comes on which forces the buy switch to stay on even though subsequent events could move us to a cash position. The Friday market move put us back to 55% long invested situation from zero invested. Is the market churning here? Perhaps.

CANSLIM investing selects stocks with great fundamentals and recommends buying them when they break out from sound price consolidations. Breakout buying has shown poor odds this year and extending back around one year. This leads me to suspect that we are churning here. I also shy away from breakout buying and look to alternate buy points, usually as close to the 50-day as I can get using a sloping line pivot or volume trigger alert.

When I create a watch list I download all stocks into excel and rank order all stocks by a combination ranking that includes: Liquidity Rank (Average dollar volume), IBD Composite Ranking, Demand/Supply Ranking (Average volume compared to the float) and Margin Rankings (includes Pre-tax Margins and Return on Equity). The top 10% of the stocks are selected in this initial screen. Then I filter each stock for these parameters:

Average EPS % gain over the last two reporting quarters >= 25%, ideally EPS showing acceleration
5-Year annual EPS gain >=25% (for stocks trading that long)
Current price >= $15 and above the 200-day moving average
Liquidity >= $10 million/day
IBD composite rating >= 90
IBD SMR (Sales-Margins and Ratios) rating A or B
Accum/Distr rating C or better
ROE >= 17% and/or pretax margin >= 16%
Group RS >=80 or at least two stocks in the group shows RS>=80 AND EPS >=80
Up/Down volume ratio >=0.85 (a 50-day ratio dividing total volume on up days by total volume on down days)
Base stage less than 6
Company is not being acquired

Now less than 2% of all stocks have passed these filters.

Each chart pattern is now manually inspected in MarketSmith for being close to a recognizable buy point and contains constructive price and volume action. In particular if the stock is extended it is passed. The stock is owned by at least one of the mutual funds in the IBD mutual fund index (IPOs excepted). Management owns at least 1% of outstanding shares
Cash flow >= 20% above last annual EPS report. This takes us to around 0.25% of the stocks I started with to reach the final watch list.

This watch list is then uploaded to the High Growth stock section of the EV site. The same stocks are uploaded to the volume alert trigger list. This list also expands the technical requirements to not necessarily be close to a classical buy point but just not be too far extended from the 50-day moving average allowing for a possible safe entry based on the volume trigger alert.

Subscribing members to the list are (or soon will) be receiving real time volume alert triggers via email.

[kimmd]

Mike- You mentioned culling the stocks down to the final list you post and that the High Growth stocks list is then placed into the volume trigger alerts. I noticed you have 10 stocks listed as longs in the High Growth List but 22 listed in the volume triggers. Is there a reason all of the 22 are not included in the High Growth List?

thx
-kim





Watch lists are updated.

IBD has the market in correction. One of the unique features of the MarketSchool model is the Power Trend. Once a rally has the NASDAQ lows above the 21-day for 10 consecutive days and the 21-day is above a rising 50-day for at least 5 consecutive days the Power Trend comes on which forces the buy switch to stay on even though subsequent events could move us to a cash position. The Friday market move put us back to 55% long invested situation from zero invested. Is the market churning here? Perhaps.

CANSLIM investing selects stocks with great fundamentals and recommends buying them when they break out from sound price consolidations. Breakout buying has shown poor odds this year and extending back around one year. This leads me to suspect that we are churning here. I also shy away from breakout buying and look to alternate buy points, usually as close to the 50-day as I can get using a sloping line pivot or volume trigger alert.

When I create a watch list I download all stocks into excel and rank order all stocks by a combination ranking that includes: Liquidity Rank (Average dollar volume), IBD Composite Ranking, Demand/Supply Ranking (Average volume compared to the float) and Margin Rankings (includes Pre-tax Margins and Return on Equity). The top 10% of the stocks are selected in this initial screen. Then I filter each stock for these parameters:

Average EPS % gain over the last two reporting quarters >= 25%, ideally EPS showing acceleration
5-Year annual EPS gain >=25% (for stocks trading that long)
Current price >= $15 and above the 200-day moving average
Liquidity >= $10 million/day
IBD composite rating >= 90
IBD SMR (Sales-Margins and Ratios) rating A or B
Accum/Distr rating C or better
ROE >= 17% and/or pretax margin >= 16%
Group RS >=80 or at least two stocks in the group shows RS>=80 AND EPS >=80
Up/Down volume ratio >=0.85 (a 50-day ratio dividing total volume on up days by total volume on down days)
Base stage less than 6
Company is not being acquired

Now less than 2% of all stocks have passed these filters.

Each chart pattern is now manually inspected in MarketSmith for being close to a recognizable buy point and contains constructive price and volume action. In particular if the stock is extended it is passed. The stock is owned by at least one of the mutual funds in the IBD mutual fund index (IPOs excepted). Management owns at least 1% of outstanding shares
Cash flow >= 20% above last annual EPS report. This takes us to around 0.25% of the stocks I started with to reach the final watch list.

This watch list is then uploaded to the High Growth stock section of the EV site. The same stocks are uploaded to the volume alert trigger list. This list also expands the technical requirements to not necessarily be close to a classical buy point but just not be too far extended from the 50-day moving average allowing for a possible safe entry based on the volume trigger alert.

Subscribing members to the list are (or soon will) be receiving real time volume alert triggers via email.

[Mike]

Mike- You mentioned culling the stocks down to the final list you post and that the High Growth stocks list is then placed into the volume trigger alerts. I noticed you have 10 stocks listed as longs in the High Growth List but 22 listed in the volume triggers. Is there a reason all of the 22 are not included in the High Growth List?

thx
-kim

Kim,
Volume Alert Triggers can be bought at places that are not classical entry points such as coming up through the 50-day or 10-day. These entries do not qualify as classical breakouts from normal bases such as Cup with Handle, Double Bottom, Flat Base, etc. I only include classical base structures in the High Growth Stock List. I also include 50-day bounces as these are included in O'Neil's standard entries.

[adam ali]

Mike,

Have you (or other CANSLIM users) developed a comparable process for shorting stocks?

Thanks,

Adam

[Mike]

Mike,

Have you (or other CANSLIM users) developed a comparable process for shorting stocks?

Thanks,

Adam

Adam,

I follow William O'Neil's methods described in "How to make Money Selling Stocks Short". The highlights of this method are the following:


Only sell a prior leading stock, perhaps one you have traded on the upside.
Short only liquid issues trading more than 1 million shares per day on average. Note you will be selling short often when the market is volatile and illiquid stocks may be to volatile to handle.
Short only two patterns: head and shoulders or failed late stage base.
The Proper time to short will often be 2 to 7 months after a topping pattern has shown itself. You can often get away with shorting earlier in the right shoulder region as the price fails the 50-day.
Wait for 2 to 4 rallies to occur after the top. These are bargain hunting or short covering rallies. These rallies often stall out at the 50-day or 200 day moving average which is where you might take a short position. You are looking for a time when the short takers become worn out after getting their positions run in too many times. The proper time is when you can determine that the short covering rally appears weaker than prior rallies.
Do not short when breaking to a new low. This is too obvious and where short covering rallies often start.
Your short entry point should be at least 20% above any prior base low to give you enough room to make a profit.
Cover your short position when the price breaks a prior low (where the amateurs are piling in short).
You are not concerned at all about fundamentals as stocks often top when their fundamentals are the strongest.


So how do I make a short watch list? I make note of stocks that are on an extended long watch list that fail the 50-day. If they trade more than 1 million shares per day I move them to an extended short watch list. I regularly visit this list to see if they are setting up properly. When they do I move them to my "ready short watch list". Thus my list requires paying attention a long time before they are set up for a proper short taking point.

The problem of late has been Mr. Market. Central bank liquidity has made short taking problematic. Medium term shorts are mostly not working as every pullback has been met by buying. Determining when this pattern is changing toward an extended correction or bear market is what is needed. I have no idea when this will happen as central banks have changed the nature of the markets. They are probably trapped as no country can afford a return to normal interest rates. Japan is the poster child of this trap. If Japanese treasury rates grew to 4% it would take 100% of tax revenue to service the debt. They will keep treasuries artificially low until the economy fails, as it must.

The market today is looking weaker than it has for a very long time. Leading stocks have been getting smashed. Maybe this is the time to venture short again.

I have not read this book yet but Gil Morales and Chris Kacher are having a new book coming out on the subject of selling stocks short. They generally follow the methods above and the book is listed at Amazon.com.

[Harry]

Great post Mike. Thanks for taking the time to put together!

Harry

[adam ali]

Yes, thanks for the great post Mike.

Adam