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How to Make Money in Stocks

  1. arthur

    7,396 Posts.

    Have kept this in my library and find it interesting

    I will post some new material It will only be a copy and paste in the hope of breaking the Bonkers gridlock and generating some new threads.

    Not personal Bonkers we need a bit of new content

    _______________________________________________


    How to Make Money in Stocks
    William O¡¦Neil
    Part I ¡V How to Pick Winners
    "CANSLIM"
    „h Current Quarterly EPS
    „h Annual Earnings Increases
    „h New Products, Management, Highs
    „h Supply and Demand
    „h Leader or Laggard
    „h Institutional Sponsorship
    „h Market Direction
    Current Quarterly EPS ¡V Should show major % increase in current quarterly EPS (18-20% min, 25-30% good, 40+% bull). Trading volume may swell substantially before big price moves. Accelerating quarterly earnings are key! Check IBD for new quarterly corporate earnings each day.
    Annual Earnings Increases ¡V EPS for each of last 5 years should show consistent increases. 15 ¡V 50% or more shows superiority
    Stability of earnings are important (good ones are below 25) This index is usually shown immediately after 5 year growth rate. Plotting quarterly earnings over 5 years and fitting a trend line will help determine deviations from the basic earnings trend.
    IBD shows relative earnings rankings (based on latest 5 year and recent quarterly earnings.
    P/E ratios depend largely on the market (high = bull, low = bear).
    New Products, Management, Highs ¡V Look for companies with popular new products or services, new management, or those creating better conditions for the industry. As a whole.. Buy when the stock is close to or actually making a new high after undergoing some degree of price correction and consolidation (the "cup with handle").
    Supply and Demand ¡V Fewer number of shares out there = more earnings per share.
    Smaller cap stocks are better prospects, and those with a large percentage of ownership by top management are better yet.
    A low percentage of total capitalization to long-term debt shows a safer investment. A company that¡¦s been reducing its debt as a percent of equity over the last 2-3 years is well worth considering.
    Leader or Laggard ¡V Look for genuine leaders in the market. Good prospects exhibit steady or even sudden increases in relative price strength.
    Sell your lagging stocks first, holding on to the leaders a little longer.
    Don¡¦t buy laggard because they¡¦re cheap; look for the leaders.
    Institutional Sponsorship ¡V Investigate where mutual funds, corporate pension funds, etc are investing, but not where stocks are over-owned.
    Know which of the better institutions have purchased a particular stock in the last quarter.
    Know if the number of institutional sponsors is increasing or decreasing, in the recent quarter.
    Market Direction ¡V Follow and understand every day what the general market averages are doing.
    IBD¡¦s market value-weighted index is best for this.
    Sell when there are poor market rallies or rally failures accompanied by market index peaks or reversals.
    Look for increased volume without upward progress of the Dow accompanied by wide daily spreads (usually after averages move into new ground and during their 3rd to 9th day of rally). Usually increased volume over 2-3 days without price increases are signs of market topping and look for divergences among several averages. For example, if the Dow was up 10, but the S&P500 was only up 2 then maybe the rally was not as broad and strong as the Dow might imply, since the S&P is a much broader index.
    Historically, when the Fed has increased interest rates three times in succession, it has signaled the end of a bear market.
    The stock market bottom is signaled by the third day of increases in total market volume with substantial net price increases (1% or more on Dow/S&P). A second confirmation of this has been the 4th to 7th day of rally attempts showing 18-20x point increases in the Dow.
    Buy Timing - buy exactly at the pivot point¡Xdon¡¦t pyramid more than 5% past the buy point. Buy when a stock breaks into new high ground after emerging from a sound price correction and consolidation period (and a 50% volume increase over average daily volume is seen). Be sure EPS has increased in each of the last 5 years.
    Part II ¡V When to Sell
    Limit losses on initial investment capital to 7%. Taking smaller loses can be likened to insurance payments.
    Sell when up 20% from the breakout point
    Track your stocks by eliminating the price-paid bias: compute the % change from one quarter to the next ¡V this forces you to consider those holdings not doing well currently.
    Take losses quickly and profits slowly.
    Sell when stock drops 8% below a correct pivot-point buying price.
    Refer to a chart of the stock for an overall perspective to avoid fear of what may be a normal pullback.
    If a stock closes for a larger increase than on any previous up days, after having extended from a proper price base, it is very close to its peak.
    The ultimate top may occur on the heaviest volume day since the beginning of the advance.
    A rapid price run-up for 2-3 weeks is called climax top activity ¡V SELL!
    If a stock¡¦s price is extended from its base and a stock split is announced, SELL!
    Consider selling if a stock runs up and then good news or major publicity is announced; big investors sell here because there are ample buyers to absorb the stock.
    New highs on decreased or poor volume indicates no demand and selling may soon overcome it.
    After an advance, heavy volume without upside price progress may precede market declines.
    Closing at the daily low indicates decline.
    Sell when everyone else is excited and buying ¡V they are fully invested and further buying will fail to push up the price any more.
    An advancing stock that opens 2 points higher than it closed on is nearing its peak.
    Price breaks over several days with no rally: SELL!
    Consider selling if a stock advances rapidly for several weeks and then retraces that advance.
    Sell when quarterly earnings slow or decline for 2 consecutive quarters.
    Consider selling if other stocks in the market group don¡¦t confirm price strength.
    Don¡¦t always sell on bad news or rumors; they are usually fleeting.
    Avoid selling on shakeouts (below major price support areas)
    Don¡¦t wait for a recovery to sell. If you didn¡¦t sell while advancing, do so after the peak.
    Reevaluate after an 8% decline following a run-up. It could be a normal 8-12% correction or the advance could be over. In either case, a 12-15% decline from the peak is a sell indicator.
    Sell if a stock make its greatest one day price drop after an extended advance.
    Sell on the 2nd or 3rd day of poor rally after seeing initial heavy selling near the top followed by a recovery with weaker volume, poor price recovery, or shorter duration.
    Sell if a stock closes the week below a major long-term up trend or breaks a key price-support area on overwhelming volume.
    Don¡¦t buy back sold stocks just because they can be bought cheaper. Wait for a second confirmation of major changes in the general market.
    Do post-analysis by plotting past buy-and-sell point on stock charts. Learn from past selling mistakes and victories.
    Sell long before it becomes painfully clear that you need to.
    Project the week to expect capital gains selling by those big volume buyers from the original price-breakout point.
    Sell stocks that surge above their upper channel line (where a straight line connects previous highs).
    Sell if it makes a new high off a third-stage base.
    On wide/loose erratic price plots, sell on new highs.
    Sell on new highs those stocks with weak bases (much of the price work in the lower half of the base or below its 200-day moving average price line).
    Sometimes sell if a stock breaks down on the largest weekly volume in 5 years.
    Some stocks should be sold when they are 70-100% above their 200-day moving average.
    Consider selling when after a prolonged upswing the 200-day moving average turns into a downtrend.
    Consider selling when relative strength drops below 70.
    Part III - When to Hold a Stock
    After a record buy, plot a red determine-sell line on a daily or weekly graph where you will cut your losses. Don¡¦t move the line up much, since normal corrections could cause dips below higher sell lines.
    Give securities 13 weeks to prove themselves dull (but not if they reach the defensive sell price).
    Any stock that makes 20% profit should never be allowed to become a loss. Set a sell minimum to ensure the 20% profit.
    Don¡¦t buy when general market is making a downward reversal.
    Hold a stock during the first 8 weeks of a move unless it gets into serious trouble or is having a 2-3 week "climax" run-up on a stock split. Unless they are poor quality or lack institutional sponsorship / strong group action, hold stocks making 20% profits through the eighth week.
    A leading stock should be held until its weekly close is below its 10-week moving average (and on increased volume).
    Hold through a stock¡¦s first short-term correction after making an initial profit.
    If you can, hold on for long-term capital gains (taxes).
    Part IV ¡V Miscellaneous
    „h Own no more than 6-7 well-selected securities totaling $1,000,000
    „h Own no more than 4-5 well-selected securities totaling $20,000 - 100,000
    „h Own no more than 3 well-selected securities totaling $5000-20,000
    „h Own no more than 2 well-selected securities totaling $3000
    Invest in real estate (at the right time and in the right place): choose areas that will grow. In which direction is the city most likely to grow? Are you close to good schools and shopping? What¡¦s the neighborhood and neighbors like? What do they do for a living (avoid areas centered around a single industry). What have houses in the immediate vicinity sold for?
    Part V ¡V Successful Investing
    Following are traits of historically strong stocks (for what they¡¦re worth):
    Average annual EPS growth 24%
    Median EPS increase, current quarter 34%
    Average P/E 15
    Average Relative Strength 85 (up and average of 6.5 months)
    Average shares outstanding 4.6 million
    Median industry group strength top 30%
    Average alpha 1.78
    Median stock price $24
    Part VI ¡V Chart Reading
    Any strong price pattern should have a definite price uptrend prior to the base pattern of at least 30% with increasing relative strength and volume.
    Look for the following areas of price correction and consolidation, usually after an earlier price advance:
    Cup with Handle ¡V 7-65 weeks (usually 3-6 months)
    „h peak to low should be 12 to 33%
    „h cup should form a broad "U", not a narrow "V"
    „h handle usually longer than 1 to 2 weeks and is accompanied by low volume. It should appear in the upper half of the overall cup structure and be above the 200 day moving average. Price drops in the handle should not exceed 10-15% of the prior peak and should have smaller daily price variation bars.
    Pivot Points ¡V this is where a stock breaks through previous corrections on increased volume (at least 50%)
    „h buying < 10% past this point is too late. These are not necessarily at a stock¡¦s old high.
    Saucer with Handle ¡V longer and more shallow.
    Double Bottom ¡V a "W" with the second dip at least equaling the first, but preferable dropping below it.
    Flat Base ¡V usually a second-stage base (following a cup / saucer / double bottom). Level, tight prices for 6-7 weeks with corrections of less than 10-15%.
    Shakeout-Plus-Three-Points ¡V drops below its low during a base-building period, buy when it recovers three points from the low (use for $30-60 stocks).
    Base-on-Top-of-a-Base (few) ¡V breaks out of a base only to form another, but it is unable to increase 20-25%. When the bear market reverses, it will skyrocket.
    High, Tight Flags (rare) ¡V moves up 100-120% in 4-8 weeks, then corrects 10-20% for 3-5 weeks. They then rocket up 200+%.
    Avoid wide-and-loose structures. They may mimic the aforementioned ones, but will be exaggerated. Look for steady increases in relative strength to buy after the prices settle down.
    Any price consolidation must be allowed 6-8 weeks to be completed.
    Low volume during price lows with very tight daily ranges for 1-2 weeks is very constructive.
    Relative Strength ¡V buy when a stock¡¦s RS is slightly better than the overall market and showing increases (emerging from base building). Sell when price advances rapidly and show extremely high RS.
    Big volume with price increases after extreme volume dry-ups show accumulation, and pending large increases.
    Pick industry groups by relative price strength of upper 25% (median strength rank of 61 out of 200).
    "Cousin Stocks" ¡V related to very successful industry leaders. E.g. BA Aerospace to Boeing and Airbus
    „h 67% of winners are part of group moves
    „h ensure your stock is in the top half of its own group
    18 Common Investment Mistakes
    Bad selection criteria
    Buying on a downtrend
    Averaging down (putting good money after bad)
    Buying cheap shares to feel like you¡¦re getting more
    Wanting huge profits now (not taking time to learn)
    Buying on tips and rumours
    Buying by low P/E ratios or better dividends
    Buying familiar company names
    Not getting good information / advice
    Not buying stock on its way into new highs
    Holding into losses and waiting for recovery
    Cashing in small profits
    Worrying about taxes and commissions before profits
    Speculating in options
    Setting price limits and missing the overall movements
    Indecision
    Not looking at stocks objectively
    Being influenced by insignificant occurrences (splits, dividends, news, brokerage recommendations)
    Investor¡¦s Business Daily Guide
    1. EPS ¡V percentage change in EPS in recent quarter, and a year ago, averaged with its 5-year earnings growth record (80+ is superior).
    2. Relative Strength ¡V 12 month price performance (80+ is superior).
    „h below 70 may forewarn of problems
    „h 87 was average before big winners broke out and soared
    3. Check weekly/daily chart for consolidation (base) or extensions in price above base.
    4. Study S&P stock report tear sheet or a Value Line report to learn the company¡¦s basic business and new products.
    5. Volume % Change ¡V stocks with "Greatest % Change in Volume" should be watched
    „h measures liquidity and market demand
    6. Check "Stocks In The News" page for the 30 best stocks making a new price high for the year.
    7. Check "General Market Indicators" for subtle divergences between various market averages e.g. new lows in the Dow, while the NYSE advance/decline line moves up showing false indications of market weakness by a doggy Dow and a strong broader market. This is always a positive sign and must be observed on a day-to-day basis.
    8. Scan "Psychological Market Indicators" for Odd Lot Short Sales. Ups indicate market lows.
    9. "Sector" Study
    „h Home in on more profitable sectors
    „h Check "Groups with Greatest % of Stocks Making New Highs"
    „h Check "Industry Prices" for best price performance
    „h Check "Companies in a Leading Industry" for specific stocks
    „h Check "Industries In the News"
    10. Select "Ups" from "Company Earnings News"
    11. Read "At The New York Analysts"

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