What does the ‘M’ in CANSLIM stand for?
Allow this post to serve as a reminder of our studies of the market in the past. I speak about the ‘M’ in CANSLIM many times throughout the year because of it’s great importance.
According to William O’Neil (www.investors.com) , it represents the overall health and direction of the major market indexes (Dow, NASDAQ and S&P 500). It is very important to understand and recognize what type of market you are in before you ever place a position (specifically trend traders). How can we realistically make money and set goals based on a blind strategy without knowing if the current market is in bear mode, bull mode, up-trending, down-trending or if it is trading sideways. The market trades sideways about 80% of the time so this leaves us with sustainable trends roughly 20% of the time. Three-quarters of all stocks will follow the general trend of the major indexes so don’t try to swim against the current.
By ignoring the ‘M’ in CANSLIM, your portfolio may get hit with losses by trading on the wrong side of the trend. Simply picture a river and understand that it is much more difficult to swim up-stream than it is to swim with the current downstream. The stock you buy may have a nice basing chart pattern and excellent fundamentals but it may come under pressure and move in the opposite direction anticipated due to the general market weakness and/or sector weakness. The same can be said in a bull market; a stock that is a sub-par performer may act strongly and give the investor solid gains due to sector strength and/or overall market strength but the gains are primarily due to sister force (in this case, a bit of luck helped your position).
Study the market and you will see that stocks move in groups and many of the stocks in a strong industry will move in tandem. The same holds true for weak markets; if you own a stock in an industry that is starting to churn or breakdown, it may be wise to pull in a portion of you position to lock in gains before the bottom drops. More times than not, the leading stock in an industry group must conform and move in the direction of the others.
As many of you know, I also use the daily new high and new low ratio (NH-NL) to compliment the overall strength that the market is presenting. The price and volume alone can fake out many investors and lead them down the path of faulty investing. In order for the market to be a formidable bull, the NH-NL ratio must compliment the general outlook and present us with at least 500 new highs per day on a consistent basis. When both the NH-NL ratio and the ‘M’ in CANSLIM are strong, we can justify placing larger positions (maximum 1-2% portfolio risk) and label the market as a bull.
William O’Neil, the founder of Investor’s Business Daily, states that many of the most profitable stocks over the past 50 years made their advances when the overall market was strong, not weak. The NH-NL ratio is always comprised of the strongest stocks in the current market and we know that these individual leaders are responsible for the bulls and the bears.
How can an investor monitor the market action to tell if it is weak or strong?