CANSLIM & Momentum Investing 02 (Aug 09 - Dec 24)

[winston]

Five Ways to Supercharge Your Portfolio Through Momentum Trading
by Dr. Scott Brown

Momentum: Force or speed of movement. Impetus of a process, such as an idea, or course of events.

That's how the dictionary defines the word "momentum."

We've all seen what can happen when an index, sector, or stock catches momentum - either to the upside or downside. However, momentum waves don't move uniformly. They can bounce up and down in an upward trend, gradually making new highs and higher lows, or they can fall into a downward trend.

While the momentum concept is nothing new, the introduction of the online momentum day-trader in 1996 has kicked it up several notches and helped create unprecedented volatility in the markets.

And being able to nail down stable, predictable, repeated price patterns gave birth to a wave of momentum-based traders. Of course, the consistent returns of momentum investors baffled "efficiency theory

" economists and stuffy Nobel Laureates who claimed that the markets move randomly like bacteria in a Petri dish, not that stocks in upward momentum price patterns are more likely than other stocks to keep rising.

But they're wrong. The key is to find a momentum model that works. And here it is...

Beat the Market With Momentum

In short, momentum investing is holding a fast-rising stock for a few days, weeks, or months.

It's a strategy where an investor tries to capitalize on a stock's trend (be it on the long or short side) in hopes of riding the move further. And it's less risky than momentum day-trading, where you're "in-at-dawn" and "out-in-the-afternoon," as long as you follow the rules below.

Momentum trading is most powerful when cash on the sidelines starts to pour into the market once it's fully recovered from a crash. For instance, it was particularly profitable from 1996 through 2000 - nine years after the 1987 crash. And the recovery from the 2000 crash was much faster, as momentum investors racked up startling returns from 2003 to 2007, using the guidelines that I'm about to explain...

Five Common Characteristics of the Perfect "Momentum" Stock

The beauty of momentum stocks is that there are very simple ways to find them...


~ Momentum Alert Factor #1: Rising Trend

One of the key traits of a good momentum stock is a rising stock price for a few weeks.

The Momentum Alert solution: Target stocks in a recently rapid rising up-trend.


~ Momentum Alert Factor #2: Institutional Ownership

The real forces behind stock market momentum are the big institutional players, mutual funds and hedge funds that trade in and out of stocks slowly, compared to the momentum players.

The Momentum Alert solution: When large investment houses buy and hold huge blocks of shares, it exerts heavy upward pressure. So look for strong institutional ownership that has been recently increasing.


~ Momentum Alert Factor #3: Earnings Surprises

Academic studies of a phenomenon called the "post-earnings announcement drift" have shown that you should search out companies that have beaten analysts' earnings expectations. This is because these stocks are the most likely candidates for stellar momentum-based returns over the course of a few weeks or months.

The Momentum Alert solution: Look for companies that are surpassing analysts' earnings expectations.


~ Momentum Alert Factor #4: Brace for Price Reversals (Know When to Fold)

The same studies I mentioned above also show that momentum stocks can unexpectedly reverse into a downtrend. For this reason, you should never buy and hold a momentum stock.

Instead, use a moving-average as an exit signal (I recommend five days for the fast moving-average and 20 days for the slow one). If you see the fast moving-average drop below the slow moving-average, get out immediately.

The Momentum Alert solution: Watch for a crossover where the fast moving-average crosses below a slow moving-average.


~ Momentum Alert Factor #5: Use Trailing-Stops

A big problem with momentum stocks is that they often drop like a rock after reversing. For that reason, you should always place a trailing-stop 25% below your entry price. This doesn't mean you'll necessarily exit there; you'll most likely sell on the moving average exit signal.

The Momentum Alert solution: Stops protect you from heavy losses and take the emotion out of the sell decision.


The Single Best Way to Invest in Momentum

You can spot likely momentum suspects by visiting the Wall Street Journal's NYSE Biggest Percentage Gainers list.

online.wsj.com/mdc/public/page/2_3021-gainnyse-gainer.html


Source: Investment U

[winston]

by lithium » Sun Dec 13, 2009 7:00 am

I'm trying to apply M in Hong Kong too. I see 7 distributions in Oct, nothing happen. Now another 5 distribution from Mid Nov till today, is anything going to happen this time?

Maybe I interpreted it wrongly? For S&P, I see 8 distributions in Oct, nothing happen. Only 1 in early Nov. Now in Dec has 3 so far.

Oct distributions has cost me some opportunity, some of my stocks goes up 50%. I'm still evaluating O'neil's "distribution

[BlackCat]

I'm trying to apply M in Hong Kong too.

I don't follow HK, but the US market has had rallies on unconvincing volume, new rallies immediately coming under pressure, market indexes higher on low vol, distribution days piling up... these are just symptoms of a trendless market for the past few months.

I think that O'neil's market-timing simply dosen't work in a trendless market. Like any trend following. But mabye try it a few more years in different market conditions before discarding it.

Unfortunately we don't know which break-up or break-down establishes a new trend until after it happens.

Personally (for S'pore mkt) I'm more afraid of the market breaking up and leaving me behind, so I'm watching for this. And buying a few individual stocks whose charts look OK. If the mkt breaks down I'm not worried as my stop losses will be hit and I'm only 25% invested.

[kennynah]

like all technical indicators, none is ever a holy grail.... none will ever be found....

but i guess, all the astute investors and traders in this forum already know it...O'Neil's method is ONE method and it may not necessarily be the best....

and oh...O'Neil sells his methods....i prefer less sensationalized tools like RSI, channels, itchymushroom, MACD, bollinger, keltner, MA, VIX, etc.... and even Black-Scholes for valuing options...

[winston]

Ride The Bubbles While You Can by Clem Chambers, ADVFN

Instead of uselessly speculating on the nature of a bull market, grab it by the horns and jump off before you get bucked.

Last year was a superb year for anyone with the nerve to pile in after the crash of 2008. As anybody would have guessed reading my column I did well from the bounce. I do not expect to make such a percentage return ever again in my life.

The crash of the credit crunch crash was a once in a lifetime opportunity to buy in cheap. If you bailed before the crash and got in after the debacle of the fall you are very happy indeed. I have been either very lucky or sufficiently skillful to do so.

The question is: What next?

http://www.forbes.com/2010/01/21/bubble ... mbers.html

[winston]

TOL:-

I was looking at the data for the S&P 500 and noticed that there were a lot of Distribution Days from Jan 13 for about a month.

Under CANSLIM, this is a dangerous situation because you are going against Market Direction.

However, the market has continued to go up from Feb 11 to the present. So how reliable is that Market Direction indicator ?

[millionairemind]

The market had a correction in late Jan.

This was followed by a FTD on March 1. Please see my post on Mar 2.

viewtopic.php?f=11&t=2810&start=10

To date, there are 3 distribution days after the Mar 1 follow thro'.

Dist. Day Count - 3 for NYSE composite, S&P 500 and Dow, 2 for Nasdaq in recent weeks

[kennynah]

Thanks MM. Abv means mkt likely to fall?

[millionairemind]

Thanks MM. Abv means mkt likely to fall?

NOt yet... the market broke 52 week high last night, but on VERY LOW VOLUMES...

If we see a couple more distribution days.. then its probably due time

[winston]

Thanks MM.

Yes, not a lot of Distribution Days in March.

But even if there's a lot of Distribution Days eg from Jan 13 to Feb 24, the market still did not tank thereafter.

So one should not automatically sell when one see alot of Distribution Days, as long as one's position has a strong Catalyst that can go against Market Direction.

However, one should maybe think twice about buying if one sees a lot of Distribution Days eg. Jan 13 to Feb 24. But I will still probably buy if I believe that the stock has a strong catalyst that can go against Market Direction.

Having said that, the distribution days were just small corrections unlike those steep drops that we saw in the past. In addition, the catalyst for the correction was not big enough to bring up the fear in people.

On hindsight, it was probably profit-taking in an uptrend market and buying on dips was the right strategy ..