What does the ‘M’ in CANSLIM stand for?
*This is an update to an article I wrote in the past*

According to William O’Neil (www.investors.com) , it represents the overall health and direction of the major market indexes. It is very important to understand and recognize what type of market you are in before you ever place a position (this may not include day traders but is extremely important to trend traders). How can you 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 with only slight deviations from an average about 80% of the time. This leaves us with a market that trends up or down with sustainable swings only 20% of the time. Three-quarters of all listed stocks will follow the general direction of the major indexes which include the NASDAQ, the DOW and the S&P 500.

By ignoring the ‘M’ in CANSLIM, your portfolio may get hit with losses if you are 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 you 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. A perfect example was the home builders, they have moved in tandem for the past eight years. If you look at their weekly charts over the past decade, you will see that they all have the same patterns but with different numbers. The image provided is from a case study I did back in 2005. Nothing has changed from 2005 to 2008 as this industry is still traveling the same road (most recently that was down).

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?

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“Higher oil, rate-hike fears and new regulations in the financial sector handed stocks their biggest beating in nearly a month…”

- Stocks Get Hit In Heavier Volume, By Vincent Mayo of Investor’s Business Daily.

There is some truth to the statement above but the charts have clearly been raising red flags that this market may be heading lower. I highlighted this trend over the past week or so I as I started to see the same faulty charts appearing on my screens. Visit these posts to see what I have been saying over the past week:

• The Big Decline
• DryShips (DRYS) Drying up?
  (By the way, DRYS was down 2.87% on above average volume – distribution)

The NASDAQ, DJIA and S&P 500 fell about 1.8%, 1.6% and 1.8% respectively as crude oil was up $1.69 to close above $123 a barrel (a new record).

I originally started to point out market troubles back on March 14, 2008 in a post titled Snapshot Friday; I highlighted both the Dow Jones and NASDAQ with clear yellow shaded areas showing the 200-day moving averages pointing down for the first time since 2003 (that’s huge if you ask me).

Yes the market is now higher than it was in March but the recent bounce is smacking up against the 200-d m.a. for the first time since 2003 for both indices. The last time the market crossed below a down-trending 200-d moving average and couldn’t recover was back in 2000 and 2001.

So what does that mean? As I said yesterday, I think it means a possible Big Decline.

The Dow Jones is now back below the 200-d m.a. and is failing to challenge recent highs. The day’s action came on above average volume which makes today pure distribution.

I hate to pick tops but we may be coming off the official top of the bull market that lasted from 2003 to 2007.

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I am a positive person by nature and I prefer to buy stocks going up but I am starting to see several leading stocks struggle to hold new highs or fail to challenge recent highs. These patterns are familiar and they are suggesting that the recent bounce is the final stage before a possible market decline. A perfect example can be the charts posted of DRYS yesterday.

Now, this big decline could take years to materialize so I don’t want to jump the gun and start yelling sell or short sell everything in sight. I trade to catch the mid to long term trends so time is on our side to determine what is happening.

• I don’t need to call the tops and bottoms of moves
• I just need to be able to identify the trend (if one exists) and then trade accordingly.
• It’s a fairly easy method of investing and doesn’t require watching the market every hour of every day.
• Trending markets are not very common to begin with but certain sectors, industries or markets are always forming some type of trend.

I will look to post up examples from former declining markets and will highlight what the charts looked like before those big declines.

Now, take a look at the charts of First Solar Inc. (FSLR). The market leader recently recorded new highs after the first correction since its IPO but it is now starting to churn. We have witnessed three consecutive weeks of churning action as the stock is not moving higher on above average volume.

I do admit that the overall trend is still higher but the red flags are starting to appear (with this stock and others).

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I start by giving a hat tip to Don Harrold from DonHarrold.net for providing the in-depth research and video highlighting the Cramer BS! And that’s what it is, BullSh*t!

The second hat tip goes to Adam from Daily Options Report who uploaded the YouTube video to his site, where I first viewed it.

Watch the video and understand what TheStreet.com is doing here. I mean, all credibility goes out the door if this is true and the image is not altered.

How many other lousy, losing stock picks does TheStreet.com erase from their website without anyone noticing? Do they really go back and toss out poor stock picks without telling the public? They should lose ALL journalistic credibility and ALL equity research credibility (if they had any to begin with).

I am glad people like Don Harrold keep an eye on the big guys because so many sheep do watch these shows and trade based off of what they say.

The second beef I have is the fact that Jim Cramer claims he was talking about Bear Stearns, the bank, and not the stock (BSC). Maybe he was because he does refer to the “liquidity” based on the caller’s question but I still have reservations.

I am wondering why a stock chart was uploaded on the screen if he was talking about Bear Stearns the bank and not the stock; they post these charts on the screen with every other stock analyzed.

Why too, did Jim forget to say the words “common stock” during the initial telecast? Let me guess: because he was talking about the stock just as he has been calling it a buy since last summer (the start of the big crash). The follow-up video of Cramer stresses the words “common stock” but he forgot to iterate this during the initial telecast. He has to be clearer considering he is speaking to an audience that takes his words at face value.

Anyway, I am wondering why the mainstream media or even competitors such as the Fox Business Network (or whatever it is called – I don’t watch these channels) isn’t calling out TheStreet.com and/ or Cramer.

I try not to be a Cramer basher but he’s such an easy target when he does stuff like this and his company does something so despicable. I leave the day-to-day nit-picking and bashing for others but I have to jump in and make it clear when something is very wrong (and involves a public company). I mean, I almost worked for TheStreet.com and Jim Cramer (I made it several rounds deep in the interviewing process to become a part of their equity research team). Fortunately for me, they went with the business school lad instead of the architecture grad.

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Advancers lead decliners by a 17-to-1 ratio on the NYSE Tuesday and 10-to-3 on the NASDAQ. The DOW was up 3.5% with the NASDAQ up 4.2% making it seem like we had a follow-through but volume was lower. Besides, the NASDAQ violated the reversal range intraday on Friday and then again this past Monday. Because of this violation, the count had already reset and Tuesday’s huge gain acts as day 1 for a new rally. I know this can be confusing but it makes sense after you study the rules and then watch it happen over several years.

We can’t call this a follow-through on day 6 for the DOW because trading volume dipped from yesterday’s totals. The count does not reset because we have not violated the intraday low from the reversal day or day 1 of the rally attempt. Leading stocks didn’t do much to lift the market today so it is better off that we didn’t have a suspect follow-through. Rebounding financial stocks lead the market higher, not something we can hang out hats on.

Read up on the CANSLIM rules if you don’t completely follow what I am talking about when it comes to reversals, rallies and follow-throughs.

Past CANSLIM Articles:

• CAN SLIM Breakdown
• IBD’s 20 Rules for Success
• Understand the ‘M’ in CANSLIM