CANSLIM & Momentum Investing 01 (May 08 - Jul 09)

CANSLIM & Momentum Investing 01 (May 08 - Jul 09)

Postby winston » Wed May 07, 2008 10:47 pm

By MARK HULBERT

MOMENTUM investing - a bet that what has gone up will keep going up - is risky at any time. But it is especially so during earnings season, when stocks often move up and down very abruptly; in fact, the top-performing stocks are particularly vulnerable during these periods.

And a new study has found that these high-fliers tend to fall immediately after their companies announce their earnings - whether those earnings are good or bad.

The study, 'Limited Attention and the Earnings Announcement Returns of Past Stock Market Winners,' has been circulating for several months in academic circles as a working paper. Its authors are David Aboody and Brett Trueman, both professors of accounting at the University of California, Los Angeles, and Reuven Lehavy, a professor of accounting at the University of Michigan.

Their findings serve as a warning about the risks of buying stocks whose prices have been pushed unjustifiably high by mass enthusiasm.

The professors looked at stocks that had been the very best performers over 12-month periods. Such stocks - those whose trailing 12-month returns were in the top one per cent of stocks traded on American exchanges - tend to rise quite predictably in the days leading up to their companies' earnings announcements - and then to abruptly give up all of those gains. The professors reached this conclusion after studying each earnings season from January 1971 through September 2005.

The patterns they found were quite pronounced. Consider two hypothetical portfolios that the professors built from this group of stocks.

The first bought each stock five business days before its earnings were to be announced, and sold each one just before the actual announcement.

The second portfolio bought each stock immediately after the earnings announcement and held the stock for five business days.

The first portfolio beat the market by an annualised rate of 47 percentage points, according to the professors, while the second lagged the market by an annualised rate of 43 percentage points.

(These rates of return reflect the effect of bid-asked spreads. Though they don't take brokerage commissions into effect, the professors say the portfolios would still beat or lag the market by large margins even after such costs.)

The professors did not find nearly as pronounced a run-up and drop-back among stocks whose 12-month performance was only slightly behind that of the stocks that led the momentum hit parade. Why was this pattern concentrated among such a small group of top performers?

The professors surmise that this is the answer: As earnings season begins, these stocks receive a disproportionate share of attention from small investors, no doubt largely because they are at the top of the leader board for 12-month returns.

This appears to lead many of those investors into bidding these stocks even higher, to levels that may be unsustainable.

The stocks decline when reality sets in - after the excitement of a positive earnings report ebbs, or, more sharply, after an earnings report disappoints the market.

These results would seem to illustrate a hazard of momentum investing - that it works only as long as it works. When momentum reverses itself, a stock may plummet.

It's theoretically possible that after dropping back in the wake of earnings announcements, this group of stocks will recover over the following few months, Prof Trueman said in an interview.

But he said that this study didn't investigate possible recovery trends, so investors would be going out on a limb in betting on one.

Another option for momentum traders would be to avoid altogether the stocks at the top one per cent of the rankings, betting instead on those that have performed just slightly behind those leaders - and thus were less likely to be magnets for some small investors.

As a result, Prof Trueman said, their prices will be less likely to be thrown out of whack.

Over all, though, the study suggests just how risky momentum strategies can be. Stocks that rise sharply may fall in just a few days' time. And they most definitely are not for the weak of heart. -- AP
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
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CANSLIM

Postby winston » Thu May 15, 2008 8:38 am

A System That Earned 350% When Put to the Test
By David Fessler

This past weekend, Jared, my 15-year-old son, was practicing aerial 360-degree rotations with his BMX bicycle on a jump and landing that he constructed behind our barn. After eating dirt a few times, he finally nailed one... and then another.

I was mowing grass at the time, and witnessed the feat. He came over and proclaimed, "I knew if I could get up enough speed, I could hit it."

What he really needed was more momentum. For us engineering types, momentum equals mass times velocity (speed). And by pedaling faster, Jared's momentum carried him higher and farther, allowing him to complete a 360-degree rotation on his bike.

Interestingly, the concept of momentum isn't just confined to physical things. Those of us in the terra-firma investment crowd can make use of it, as well.

Investopedia defines momentum investing this way: "An investment strategy that aims to capitalize on the continuance of existing trends in the market. The momentum investor believes that large increases in the price of a security will be followed by additional gains and vice versa for declining values."

So what are signs that a stock has momentum? Heavy volume for one.

Stocks that the market really likes have a much greater chance of hitting new highs repeatedly. If a stock trades at miniscule volumes, it's likely out of favor with the investment community, and chances are it won't be going anywhere.

What's more, if the stock is sought after by institutions, the buying will take place in large blocks over a period of days or weeks, in order to have as minimal effect as possible on the price.

Large block trades – and the corresponding increase in volume – is a dead giveaway that the big boys are piling in. If you're fortunate to own one of these stocks, the gains can be extraordinary.

One of momentum investing's biggest proponents is William O'Neil, the founder and Chairman of Investor's Business Daily.

O'Neil, a stockbroker in a former life, achieved guru status in the 1990s with a momentum strategy that became wildly popular with do-it-yourself investors.

In his 1988 book, How to Make Money in Stocks, O'Neil coined the term "CANSLIM" to promote his investment strategy.

Each letter stands for one of the seven characteristics O'Neil says that all stocks have when they're poised to make big gains:
C = Current Earnings Per Share: A minimum of 25% and rising over the past few quarters.
A = Annual Earnings: At least 25% or more, over the last three years.
N = New Product (or service): To fuel the company's growth.
S = Shares Outstanding: Preferably, as few as possible. The fewer the number of shares, the faster the movement of the stock.
L = Leader or Laggard? O'Neil suggests that a stock's Relative Price Strength should be at least 80 (which means it has outperformed 80% of publicly traded companies).
I = Institutional Investors: Increasingly piling into the stock.
M = Major Markets: Should be trending higher, since 75% of all stocks tend to follow the market's overall direction.

O'Neil has repeatedly stated that "CANSLIM" is not momentum investing, and that he's not a momentum investor. His view is that the CANSLIM system singles out companies that, first and foremost, have strong fundamentals.

Regardless of O'Neil's feelings, what he practices is, in fact, momentum-style investing. And you can do it too.

So, how well does it work?

The American Association of Individual Investors (AAII) conducted a study using O'Neil's CANSLIM system from 1998 through 2002 and found that it was reliable, predictable and a strong performer in both bear and bull markets.

And the best part? It produced a 350% gain over the five-year period.

AAII concluded that it was a good strategy for, "active investors looking for growth stocks."

And O'Neil's system isn't bothered by high P/Es, either. While stocks with lofty P/Es tend to be more volatile, they're also some of the fastest moving.

So we suggest you check out O'Neil's CANSLIM approach, pick out a few candidates, set your trailing stops and enjoy the ride. Just don't try any aerial 360s...
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Re: CANSLIM

Postby winston » Thu May 15, 2008 8:39 am

Relative Price Strength is a comparison of a stock's performance to that of a market index. Generally the S&P 500 or the Dow Jones Industrial Average is used. A rising line indicates that the stock is doing better than the market and the declining line indicates that the stock is not doing as well as the market. But there are a few other things to be aware of.

Relative Strength is based on the S&P 500 index, which may or may not be appropriate for the company being compared to it.

Relative strength can be calculated for many different periods of time, and it is important to note whether the performance is from the past month or past year. A company’s lifetime performance may be better than the last few months, or years.

This measure can only tell us what a company has done in the past and not what it will continue to do.

Companies with higher relative strength in down markets have shown to continue to be high as the markets move upwards.
Relative Strength should be used in conjunction with other indicators and not as a sole reason to buy or sell.


Volume is another tool helping investors decipher the movements of stock prices. It can confirm or disprove whether a stock’s movement is sustainable. Volume is one of the purest examples of supply and demand for a company.

As the demand increases, the supply will decrease and drive the price up. As long as the demand for a stock remains high, and the supply is small or shrinking, the price will continue to rise.

All stocks have an average trading volume that can tell you whether the volume for any particular day is above or below average. Other things volume tells us are:

In many momentum plays you will see the volume increasing. Strong stocks will see their volume increase as the price increases, while price increases on lower volume are considered suspect

High volume days can signal changes in direction or continuations of trends.

Volume is one of the few indicators that informs investors immediately whether a stock is being accumulated or not. Many other indicators use older data.

Volume and Relative Strength are just a few of the tools investors should use when making informed decisions on whether to purchase or sell a company. Understanding these signals will give you a leg up on many investors who do not.
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Re: CANSLIM / Momentum Investing

Postby helios » Thu May 15, 2008 3:29 pm

dear MM: thank you for e pdf.links.

u've boxed up e paragraph: long winners tend to have portfolio small-mid caps companies; eg. CanSlim method & Neff Screens, piotroski screen.

e question is: can u perhaps summarise: how we r able to derive some measurements/ screens that r more applicable to SGX (if any)? ie. rapid growing, yet small-cap companies that r in their exponential phase?

ie. i actually noticed some financial bloggers do explain their portfolio over time; and they do have a balance of small-mid caps collections.

Let me quote Kleer (e extraordinaryprofits guy) who actually wrote this in his blog (5-May):
If you want to work toward that mythical 50% mark, you'll need to consistently crush the market by finding the next home run stock and holding for five years or more. Your best chance is by going small. Why's that? First, small caps, because of their size, have more upside potential than large caps do. Second, because Wall Street players are typically constrained to looking only at large- and mid-cap companies, you can take advantage of pricing inefficiencies. With small caps, you can get greater rewards -- and you don't have to outwit a horde of Ivy League CFA-types to buy the best ideas.

thank you for your explanation.
[Finance disclaimer: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought regarding investing of any stocks/ funds and/or whatsoever. The author has no vested interest in the mentioned stock at the time of writing.
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Re: CANSLIM / Momentum Investing

Postby millionairemind » Thu May 15, 2008 3:45 pm

San,

Very paiseh :oops: I think it is better you learn directly from the Master Bill O'Neil. I novice only... lose money nobody see.. :D

The "boxed up" paragraph was done by Investors.com.. not me...I just attached the links.

Cheers,
mm
"If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong" - Bernard Baruch

Disclaimer - The author may at times own some of the stocks mentioned in this forum. All discussions are NOT to be construed as buy/sell recommendations. Readers are advised to do their own research and analysis.
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Re: CANSLIM / Momentum Investing

Postby millionairemind » Tue May 20, 2008 3:09 pm

Sometimes it is actually safer to buy stocks that break all time high than buy stocks that is breaking all time low...This strategy typically applies to US stocks.. where there is institutional sponsorship.

Why? Two factors are at play in my view. That is Y CANSLIM works. :D

1. The human need to avoid loss (pain) and gain pleasure. It is psychologically proven that a loss is 2.5 times worse than a gain.

When a stock is climbing out from a low base.. you will see it meet a lot of overhead resistance. Most investors don't cut losses (unfortunately). The pain of them seeing their favorite stock tanked is too great, esp. looking at the price they bot and the current low price (heart pain pain :cry: ). Most investors will promise themselves - "JUST LET ME BREAKEVEN AND I WILL GET OUT". Also because human beings have a need TO BE RIGHT!!! The stock mkt is an expensive place to find out that you can be wrong many times.. :P..

I have gone that route many times.. trying to argue with the mkt when I was younger.. now I just cut and move on.. :)

This creates pockets of resistance for the stock. The longist want the stock to move but the "security guards" wants to get out once the stock hit their bought price weeks ago. Those wanting to get out might easily overwhelm those buying up and the stock will turn down again.

2. Only if it breaks its 52 wk high on conviction (high volume) that it will move even higher because there is no longer any more overhang of stocks.

The second human condition is called recency bias. It is a psychological condition of the mind that only remembers the most recent lows and highs. So there are traders out there who trade support and resistance and will sell before they hit the resistance (52 wk high).

Recency bias is also why some stock market watchers are saying that we must not break below the recent low of 2800(?) as it will create more downward draft.

To illustrate this point, here is the chart of Mastercard..

Image

Here is the chart for POT...which unfortunately slipped under my radar.. I was an idiot cos' the FARM bill and the energy independence bill passed 2 years ago should have alerted me to POT, MON, DE and others in the agricultural sector.

If you were afraid to buy it as it blasted out of its 52 week high back then.. you would have missed out some spectacular gains.

Image

This is NOT A SELL/BUY recommendation.. just some charts to explain how CANSLIM works...
Last edited by millionairemind on Tue May 20, 2008 3:28 pm, edited 2 times in total.
"If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong" - Bernard Baruch

Disclaimer - The author may at times own some of the stocks mentioned in this forum. All discussions are NOT to be construed as buy/sell recommendations. Readers are advised to do their own research and analysis.
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Re: CANSLIM / Momentum Investing

Postby kennynah » Tue May 20, 2008 3:17 pm

thanks MM...good one.

the name...CANSLIM....it must be so adorable to all women...if Can Slim, sure must be winners
notice our san guniang first responded.... 8-)
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Re: CANSLIM / Momentum Investing

Postby 8percentpa » Tue May 20, 2008 10:39 pm

I have just finished reading O'neil's book. Overall quite impressed by some of the ideas that he proposed. But can't help feeling a bit sian when he starts selling his system with the book, like telling pple to subscribe to his website and its fantastic services etc. I guess it is easier to make money teaching how to invest than to actually make money investing...
I belong to a group of investors believing in obscure stuff like value-for-money, contrarian thinking, mean reversion etc. My blog at
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Re: CANSLIM / Momentum Investing

Postby kennynah » Wed May 21, 2008 12:30 am

i getthe same feeling that he was promoting his services... but as long we look beyond it...he does make some convincing arguments on his technique...

i had this discussion with GR and MM before and we came to conclude that we all have different styles... some of us, incorporate several methods from successful investors...

and that style, evolves through time and tests...

it's like someone teaches us to swim...can tell us, do this do that...but eventually, we do the strokes by ourselves...sync with our abilities and physique...

good luck !!!
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Re: CANSLIM / Momentum Investing

Postby LenaHuat » Wed May 21, 2008 9:57 am

kennynah wrote:i getthe same feeling that he was promoting his services... but as long we look beyond it...he does make some convincing arguments on his technique...

i had this discussion with GR and MM before and we came to conclude that we all have different styles... some of us, incorporate several methods from successful investors...

and that style, evolves through time and tests...

it's like someone teaches us to swim...can tell us, do this do that...but eventually, we do the strokes by ourselves...sync with our abilities and physique...

good luck !!!


On swimming, look at Mao Tze-Tung and Deng Xiao Peng 's swimming styles. :lol:
Can only see their heads bobbing up n down and don't know what they had been doing with their legs. So can keep heads afloat and cross the river, OK liao.
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