This time marks the eighth installment of William O’Neil’s Growth Stock Discovery Series. For those who missed the previous articles, please take a moment to read them through the following link:
I would recommend purchasing William O’Neil’s book to thoroughly understand the details of his investment methodology.
- CAN-SLIM’s “M”: Market Direction
- Market as a Whole
- Analyze the Overall Market Indices on a Daily Basis
- Protect Yourself from a Market Downturn
- Utilize a Stop-Limit Order for Cutting Losses
- Identify the Market Top
- Warning Signs of a Bear Market
- Identify the Market Bottom
- Check the Average Stock Prices and Trading Volumes Every Hour
CAN-SLIM’s “M”: Market Direction
The “M” in CAN-SLIM stands for “Market direction.”
In this element, the focus is on the overall market trends and their impact on investment decisions. Here are some key points related to “M”:
- General Market Trend: When selecting successful stocks, it is crucial to first understand the trend of the overall market. In a strong market, many stocks tend to rise easily, while in a weak market, challenging conditions are expected.
- Check Major Indicators: Confirm the movements of major market indicators and indexes, such as the S&P 500 and the Dow Jones Industrial Average. These indicators provide clues about the broad market trends.
- Many Stocks Rising: In the quest for successful stocks, it is desirable to find a strong market where many stocks are rising. In a robust market, leadership stocks also tend to rise easily.
- Consider Diversification: When the market is in a broad uptrend, reducing risk through diversification is essential. Successful investors are sensitive to market trends and construct portfolios with appropriate diversification.
When selecting successful stocks, it’s crucial to consider the overall market conditions and understand the trend of the market. Even if you find stocks that meet six out of the seven CAN-SLIM principles, it’s meaningless if you can’t accurately determine the market’s direction.
In a downtrending market, three out of the four stocks you own may plummet along with the average stock price. Investors, like many in 2000 and 2008, may face significant losses.
Therefore, it’s essential to learn a reliable and proven analytical method to accurately judge whether the current trend is upward or downward. Even professional investors and brokers often lack these essential skills.
Many investors rely on others for investment decisions, but it’s doubtful whether these consultants or advisors have reliable rules to determine when the market is entering a high-risk downward phase.
However, knowing just the direction of the market is not enough. Understanding whether an upward trend is in its early stages or near its end is crucial. Additionally, accurately assessing the current state of the market is essential.
To determine whether the market is undergoing a normal medium-term decline or whether the surrounding environment is causing prices to fall, considering the country’s economic situation is necessary.
To make such judgments, one must learn how to correctly analyze the entire market. Starting with a fundamental understanding is crucial in this process.
Market as a Whole
The term “market as a whole” typically refers to major market indicators. These comprehensive indicators provide a rough understanding of daily trading strength or weakness and sometimes serve as a guide to indicate the latest market trends. Here are some examples:
- S&P 500:
- An indicator by Standard & Poor’s representing the average stock prices of 500 major companies. It reflects a broader and more contemporary market trend compared to the Dow.
- Nasdaq Composite Index:
- An indicator known for its volatile movements, reflecting the latest market conditions well. The Nasdaq market, traded through market maker networks, lists many young, innovative companies experiencing rapid growth, with a slight bias towards the high-tech industry.
- Dow Jones Industrial Average:
- An index comprised of 30 large-cap stocks, initially focused on industrial stocks sensitive to economic conditions. It has evolved to include a broader range of companies, such as Coca-Cola and Home Depot. It is sometimes criticized for being outdated and susceptible to temporary artificial manipulation.
- NYSE Composite Index:
- An index calculated using a market capitalization-weighted method, encompassing all listed stocks on the New York Stock Exchange (NYSE). It provides a comprehensive overview of the overall market trends by considering the entire spectrum of companies listed on the NYSE.
Analyze the Overall Market Indices on a Daily Basis
In a bear market, stock prices tend to open strongly and decline at the close. Conversely, in a bull market, stocks may open weak but tend to rise by the end of the trading day. Since market trends can change rapidly, it is essential to observe the market averages daily.
Effectively using major stock indices allows for a more direct, practical, and effective assessment of market trends and directions. Relying excessively on supplementary indicators should be avoided. Due to the absence of a proven method for precise timing, even with the use of numerous technical and economic indicators, accurately predicting market behavior is challenging.
It is crucial to maintain independent judgment without being swayed by newsletters or expert opinions. Historical evidence also suggests that markets may rise in the face of unfavorable news.
When the market reaches its peak, it is important to sell holdings, convert some into cash, and reduce margin trading to safeguard the account. Individual investors can liquidate assets in 1 to 2 days and discontinue margin trading. Once the market stabilizes, resuming margin trading is an option.
Missing the opportunity to liquidate assets at the market’s peak may lead to a rapid decline in stock prices in an uncertain market, emphasizing the need for cautious actions.
Protect Yourself from a Market Downturn
Napoleon left the words, “Never hesitate in the midst of battle; decisiveness is more advantageous than the enemy.” In reality, he achieved victories over the years with his decisive actions.
The stock market is also a battlefield, and quick decision-making can significantly impact an investor’s success.
When signs of the market hitting its peak are identified, swift action is necessary. Selling the held stocks promptly is crucial.
If there are indications that the market is plateauing and is turning significantly downward, immediate action is needed. Selling existing stocks at market prices and liquidating more than 25% of stock assets is recommended.
Using market orders is advised over limit orders. Focusing on small price differentials might cause one to miss the opportunity to sell.
For those with margin accounts, quick action is more crucial. If the entire portfolio is leveraged with half of the assets borrowed through margin trading, a 20% drop in stock prices results in a 40% reduction in funds. A 50% drop causes a complete loss of funds.
Overcoming a bear market with margin trading should be avoided.
Utilize a Stop-Limit Order for Cutting Losses
Setting a limit-sell order, also known as a stop-limit order, allows investors to predefine a specific selling price and automatically execute the sale if the market reaches its peak and enters a downtrend.
By configuring a limit-sell order, when the stock price falls to the specified level, the order is executed as a market order, mechanically selling a significant number of shares.
This enables investors to promptly respond to market fluctuations, minimizing potential losses.
However, it’s essential to exercise caution when using limit-sell orders. Implementing such orders may expose an investor’s trading strategy or intentions to market makers, and there is a risk that deliberate use of stop-loss orders could artificially lower stock prices.
Therefore, it’s generally advisable not to rely solely on limit-sell orders but instead to carefully observe holding positions and establish clear-cut stop-loss levels in advance.
Nevertheless, in situations where monitoring stock prices continuously is challenging or when emotional or physical constraints make implementing stop-losses difficult, limit-sell orders can serve as effective tools.
Identify the Market Top
To identify the market top, it begins with careful daily observation of key indices such as the S&P 500, NYSE Composite Index, Dow Jones Industrial Average, Nasdaq Composite Index, etc.
During a continuing uptrend, a phenomenon known as “increased volume without a corresponding increase in stock prices” may occur. This is characterized by a day where the overall market volume increases compared to the previous day, while stock price indices stagnate or show a loss.
This situation is referred to as “increased volume without an accompanying rise in stock prices.” The average stock price for that day doesn’t necessarily have to close lower, but it typically tends to do so. This phenomenon indicates significant selling of stocks by institutional investors, known as an “exit sell-off,” and it may result in a larger spread between the day’s high and low compared to the previous day.
In the period just before reaching the market top, there is typically a period of three to five days, spread over four to five weeks, where exit sell-offs occur. In other words, there tends to be a trend of exit sell-offs while the market is still in an upward phase.
One reason why investors find it challenging to identify exit sell-offs is that they occur over a relatively short period, lasting three to five days over four to five weeks. If clear exit sell-offs happen multiple times within this period, the market tends to transition into a decline.
In some cases, even over a shorter period of two to three weeks, if there are clear exit sell-offs spanning four days, the likelihood of the previously rising market turning bearish increases.
In certain situations, during the process of the market attempting to reach new highs, exit sell-offs can occur over an extended period, lasting more than six weeks.
Warning Signs of a Bear Market
When leading stocks start stumbling and, instead, speculative low-priced “junk” stocks begin to emerge, investors need to be cautious.
Stagnant stocks lack the ability to lead the market and drive stock prices higher. Therefore, the emergence of junk stocks among the most active stocks on days when the market is rising can be a warning sign.
This may simply indicate that weaker stocks are attempting to lead the market.
It is unlikely for the worst-performing stocks to lead the market for an extended period when even the best-performing stocks couldn’t.
Reversals at the top typically occur within three to nine days after the average stock breaks out of a small base and starts heading towards new highs.
This suggests that the duration of the entire top-forming pattern is relatively short.
It’s important to note that even after reaching the top, there can be a recovery period for several months, and prices may return to or even exceed the previous high levels.
This phenomenon is rooted in psychology, as many investors tend to struggle to take the correct actions when they truly need to.
Identify the Market Bottom
Once you’ve sensed the arrival of a bear market and reduced the number of stocks you hold, the next consideration is when to re-enter the market.
Returning too quickly might expose you to the risk of losing funds if a temporary upswing doesn’t sustain. On the other hand, hesitating just before a significant recovery could mean missing out on substantial opportunities.
In this situation, relying on the overall market average is crucial. Market trends are more reliable than emotions or personal opinions.
During periods of stock price adjustments, markets may attempt an upward move at some point, regardless of the scale of the correction. However, hastily jumping on this wave may result in losses.
It’s essential to cautiously wait until you can confirm that the market has entered a new upward trend. The testing of highs begins when major stock averages rise and close higher after a period of decline.
For example, if the Dow sharply declines in the morning but recovers and closes at a higher point in the afternoon, or if the Dow drops and closes lower but recovers the next day, these could be considered starting points for testing highs. Usually, the actual day when the market rises and closes higher is considered the first day of testing, but there can be exceptions.
Success often lies in patience and waiting steadfastly for the right moment.
Check the Average Stock Prices and Trading Volumes Every Hour
Traders who can accurately observe market trends perform hourly investigations into the average stock prices and trading volumes, especially during crucial market turning points. They conduct this analysis by comparing the hourly trends in market average stock prices and trading volumes with those of the same hours on the previous day.
When the market attempts a rebound after marking a top and experiencing its first decline, checking the hourly trends in trading volumes proves most effective. This helps in understanding movements where the increase or decrease in trading volumes stops.
Moreover, signs like a weakening upward momentum in stock prices in the latter half of the day accompanied by an increase in trading volumes may indicate a potential exhaustion in the rebound.
Similarly, when the average stock prices reach previous low levels and test support lines (levels where investors are psychologically reluctant to see further declines), observing trading volumes can be beneficial. If a significant increase in selling appears in the trading volumes, it suggests significant downward pressure on the market.
Patterns such as no increase in trading volumes even several days after stock prices fall below previous lows, or when average stock prices stop declining and trading volumes rise for one to two days, may indicate a potential “shakeout.” This situation often involves the market exerting significant selling pressure on traders, inducing them to cut losses. It suggests that after weak shareholders are eliminated, there may be signs of stock prices rising again.
コメント