Ask the Market for Directions This Year

Physician's Money DigestJanuary31 2003
Volume 10
Issue 2

Besides being an investment method,CANSLIM™is also an acronym. And thelast letter of the acronym, the M, stands formarket direction. Nowadays, this M is the mostimportant letter in CANSLIM™. Although theacronym consists of 7 keys to finding leadingstocks, none compare to the marketdirection's impact on an investor.


Without the market direction in favorof an investor, 4 of 5 stocks (even breakouts)will go down. That's why disciplineand market direction knowledge (ie,knowing the indicators to look for thatconfirm a market recovery) are keys tosurviving and outlasting a difficult bearmarket. In addition, having a safe placeto hide during a poor market can provideinvestors with valuable protection.

And this is the beauty of howCANSLIM™performs in a down-trending,no-place-to-hide market. It's similarto avoiding a huge snowball rollingdown a hill. The wise person, of course,steps aside and waits for the snowball to pass beforeclimbing the mountain. They don't stand in thesnowball's path. By stepping aside and placing theirmoney in cash or money market funds, many disciplinedmoney managers and investors havemissed the majority of the bear market devastation.

There is no need to feel it is necessary to pushtrades and attempt to make money in all environments.It is just as critical to protect prior profitsduring down-trending markets. The importance ofprotecting prior profits may be more dramaticthan you imagine. An investor with a $100,000portfolio that loses 50% of its value (on average,stocks lose 70% of their peak value and only 30%regain their prior highs) will need a 100% gain toreturn to the $100,000 level. This type of statisticwill make an investor think before plowinginto a down-trending market. Thefactors of market direction, according toCANSLIM™, will need to line up withthe action of the markets.

We suggest going into the marketgradually during a potentially sustainablerally. The process is similar to gettinginto a swimming pool. First, youcheck the temperature. As you getdeeper invested into the market, themarket should be making strong, constructiveheadway, as well as increasingprofits in your initial positions, untilyou are fully invested in a raging bullmarket. Other investing systems quitesimply do not have this maneuveringcapability, nor do they have the precisequalifications for discovering leadingstocks. As a result, investors have lost an unthinkableamount of their investment capital.


Every investment strategy has times when itdoes not perform that well. Following are somethings to consider when applying the CANSLIM™style in the current market environment.

Pay attention to breadth as an additional confirmationof the rally. For example, carefully monitorup/down volume, along with advances vs declines,on a 5-and 10-day moving average basis.This can protect investors from false rallies. Also,in a decent trending market, breakout failurerates should not exceed 40% to 50%.

In a market that appears to be headed formore of a trading-range environment, your entryis critical if you want to avoid being whipsawedand stomped out. We have seen many stocksbreak out, only to fail immediately. It may be agood idea to buy some stocks after the breakoutand retest on a significant level, like the 50-daymoving average or pivotal buy point. In this verytough climate, adding to positions should bedone on a pullback basis and not on a predeterminedextension of the breakout price.

Spend your time finding companies showingan earnings rebound of 3 to 6 quarters. Some ofthe best performers coming out of the 1973 to1974 bear market showed similar characteristics.Having systems in place to probe deeper into theaccuracy of earnings and reliable earnings forecastsshould be a priority.

Unfortunately, many traders and investors oftenperform counterproductively when they get scared.A changing market sometimes scares an investor somuch that they begin to doubt their investing style.This doubt increases and they eventually abandontheir original strategy. Sure it's natural to want tojump ship when times are rough, but it's critical forinvestors to stick with what has worked, only slightlyadapting their strategy. If you are losing, loweryour position size until you get back in the grooveand build a track record of several consecutiveweeks before trying to get bigger again.

Michael Doran is a private money manager

affiliated with Sierra Capital Planning in

northern California. He runs a fee-based business

and a hedge fund for qualified investors.

For more information, call 877-467-8657 or

visit Christopher

Nezbeth contributed to this article.

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