Becoming a MarketSmith YOUR GUIDE TO CONDUCTING STOCK RESEARCH AND APPLYING IT TO YOUR PORTFOLIO

Transcription

1 Becoming a MarketSmith YOUR GUIDE TO CONDUCTING STOCK RESEARCH AND APPLYING IT TO YOUR PORTFOLIO

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3 Forward I m excited that you ve chosen to become a MarketSmith and made the commitment to take charge of your investment life. Imagine, from now on, you own your upside and control your downside. It s a powerful personal position to take. You bring that take-charge intention, and MarketSmith gives you nearly everything else you ll need. This guide explains how. The first section takes you on a tour of the MarketSmith platform, so you can get your bearings and be ready to work. The second section steps you through the key pieces of investment research you can put into practice to stay on the right side of any market, and in tune with your investment style. Seasoned and novice investors alike will find this guide offers many best practices to increase your probability of success. The investment team that helped develop MarketSmith is the same team that put together this reference guide. Their knowledge, built over decades, will show you how to not just survive but thrive through a wide variety of market cycles. This next point is crucial. We wish the market only went up, but we all know that reality is a lot more volatile and many times worrisome. MarketSmith helps by keeping you from getting too caught up in the emotional side of investing. By focusing on your routine, the daily market action, and its effect on stocks in your portfolio or watch list, you are much less likely to make costly investing mistakes. I am confident that, as you begin using MarketSmith, you ll find that it saves you valuable time, deepens your market knowledge and fuels your instincts for improved portfolio performance. Happy Hunting! W. Scott O Neil 1

4 Copyright 2017 Investor s Business Daily, Inc., Investor s Business Daily, IBD, CAN SLIM, and corresponding logos are registered trademarks owned by Investor s Business Daily, Inc. MarketSmith is a registered trademark of MarketSmith, Incorporated. The material contained herein is not to be reproduced, redistributed, published, stored in a retrieval system, or transmitted in any form or by any means, electronic mechanical, photocopying, recording, or otherwise, without prior written permission of Investor s Business Daily, Inc. and MarketSmith Incorporated. Data provided under license agreement by William O Neil + Co. Incorporated. All material presented here has been obtained or derived from sources believed to be accurate, but Investor s Business Daily, Inc., MarketSmith Inc., and William O Neil + Company, Inc. do not guarantee its accuracy and it may possibly be incomplete and/or condensed. The contents are based on the study and interpretation of available data as it relates to our historical models of the best performing stocks. This is not a prospectus; no effort on our part with respect to sale or purchase of any securities is intended or implied. Any chart appearing in this material is for educational purposes and is not, and should not be construed as a recommendation or rating to buy or sell any security. It is possible that at this date or some subsequent date the officers, directors and/or shareholders of William O Neil + Company, Inc., MarketSmith Inc. and Investor s Business Daily, Inc. and their affiliates own securities or buy or sell securities listed in the following pages or those not mentioned.

5 TABLE OF CONTENTS Using MarketSmith Getting Started Page Signing In 6 Charts Charts Overview 7 BATS Real Time Reference Data 8 Pattern Recognition 9 Alerts 10 Chart Legend 11 Related Information Panel 12 List Panel Stock & Fund Screener List Panel Overview 13 Creating Lists 14 Customizing Your View 15 Reports 16 MarketSmith Growth 250 Report 17 MarketSmith Growth 250 Report and Pattern Recognition 18 Screens, Alerts, and Notes 19 Screener Overview 20 Customizing the Screener 21 Preset and Shared Screens 22 Index of Screenable Criteria 23 CONTINUED > 3

6 Support Resources Page MarketSmith Tutorial 24 Help Menu 27 Education and Support 28 Applying MarketSmith Identify Winning Stocks 33 Time the Market 49 Buy Right, Sell Right 57 Develop a Routine 69 Evaluate Sponsorship & Industry Groups 77 Further Study These icons will direct you to resources you can use to deepen your understanding of the topics in this section. Webinars: These web-based presentations are accessible at your convenience in the LEARN section of MarketSmith.com. Case Studies: Use MarketSmith charts to view added examples of stocks and indices that further illustrate market concepts and terms. 4

7 Using MarketSmith

8 Getting Started Signing In To sign in, go to marketsmith.com. Select the orange button at the upper right of the screen, type in your and password, then select Go. You will be taken to the MarketSmith membership home page featuring customizable RSS feeds, current market conditions, and recent community overviews. Sign in at marketsmith.com 6

9 Charts Charts Overview MarketSmith provides daily, weekly, monthly, and intraday stock charts that display both fundamental and technical data. To pull a specific chart, type in the symbol of the stock, mutual fund, industry group, or index in the top left corner box and press enter. Switch between daily, weekly, monthly, and intraday charts. Use Tool Help to get more details on stock chart features. Enter the symbol here. Change the chart date to view historical charts dating back to Click the Alerts icon to manage, view, and set alerts. 50-Day Moving Average 200-Day Moving Average Relative Strength Line Insider Buy/Sell Transactions Fundamental Data Questions? (800) reachus@marketsmith.com 7

10 Charts BATS Real Time Reference Data BATS is a leading global operator of exchanges and services for financial markets around the globe, committed to making markets better for traders, investors and issuers. The BATS data is provided for free as part of your MarketSmith subscription. BATS data indicator Enable BATS Real-Time data here 8

11 Charts Pattern Recognition Our proprietary pattern recognition will display base patterns on both daily and weekly charts. It is designed tyo help you identify some of the more common patterns, such as cup with handles and flat bases. To turn on pattern recognition, click on the icon in the upper right corner of chart. Pattern Recognition button Profit-Taking Zone Buy Zone Loss-Cutting Zone Questions? (800)

12 Charts Alerts Our alert feature will allow you to stay on top of any stocks without having to watch the screen all day. There are a couple of types of alerts you can set. The basic price alert will trigger if the stock reaches the pre-set price you have identified, whether it is above or below the current price. Trend line alerts are also available. By drawing a trend line with your temporary line pen, the MarketSmith tool will alert you when the stock price breaches that trend. It will extend out and follow the stock so you do not have to worry about adjusting it later on. Lastly, you can set alerts using the Pattern Recognition algorithm. If a stock breaks out of a base, the alert will trigger based on the pivot price. The alerts can be ed to you and will trigger whether you have your Marketsmith open or not. Triggered Alerts indicator Manage Alerts 10

13 Charts Chart Legend Find the definition of each of the components of the daily, weekly, and monthly charts and pattern recognition by accessing the Chart Legend at the bottom left corner of the stock chart or by selecting the Chart Legend from the Chart Tools ( ) drop-down menu. For more comprehensive information on reading stock charts, please refer to the Learn section of marketsmith.com. Hover over any feature. Feature description appears here. Questions? (800) reachus@marketsmith.com 11

14 Charts Related Information Panel Related Information for each stock, fund, or index appears on the sliding panel to the right of each chart. Open the panel for a stock to reveal in-depth information, including a stock s institutional ownership, industry and sector, news, and options data. MarketSmith also provides a Checklist to see how your stock measures up to the trading strategies of investment legends such as William J. O Neil, Warren Buffett, and Peter Lynch. Move between buttons for in-depth analysis. Click the Related Information tab to hide or expand the window. Help Menu View all stocks in Industry Group or Sector. 12

15 List Panel List Panel Overview The MarketSmith List Panel serves as an area to organize and manage your investment research. Create new lists, view saved lists, and share lists with the MarketSmith community. Also access proprietary MarketSmith preset lists in the Reports and Markets/197 Industry Groups folders to generate new stock ideas. The lists are categorized by folder. Find pre-set lists under Reports and Markets/197 Industry Groups. Play a stock or fund list as a slideshow. Control the interval speed from the pull down menu ( ) to the right. Double-click on any stock to pull up the chart view. The List Panel features column headings which can be expanded or contracted. Drag and drop columns to reorganize. Use List Panel Tools to customize column headings, print, and export lists. Use List Panel Help to get information about List Panel features. Questions? (800) reachus@marketsmith.com 13

16 List Panel Creating Lists Innovative list design allows you to collect and organize ideas as you conduct your research. To create a new list, start by selecting the New button in the List Manager. A new list will appear at the bottom of the My Lists expanded view, called Untitled List; click the box to enter a name for the new list. Add stocks to your new list by dragging single or multiple rows of stocks, funds, or Industry Groups from other lists in the List Manager. Click New > List to create and name a new list in the List Manager. Use the Add to List button to add the stock chart you are viewing to a list. New stocks can be added to your list by dragging and dropping symbols from reports and screen results, or typing symbols directly into the cell. 14

17 List Panel Customizing Your View List management functions allow you to continually customize what information is displayed on your lists with a choice of over 250 data points available. Customize the layout of your list display by selecting the Custom Column Layout option from the List Tools ( ) menu. Select a category, then click and drag the specific criterion to the column layout preview. Save and name your layout, then apply the changes to your current list. Click any title header to sort the list by that category. Questions? (800) reachus@marketsmith.com 15

18 List Panel Reports MarketSmith Reports run preset screens against the O Neil Database to create specialized lists for stocks, mutual funds and industry groups. From these lists, you can filter stocks or funds based on your specific performance criteria. Select a Report from Stocks, Industry Groups, Mutual Funds, or Options sub folders. Report contents are displayed to the right. Click on any list item to launch its chart. Click on the information icon to display the properties of a particular list. Click the icons to adjust the List Panel view. The O Neil Proprietary 197 Industry Groups can be accessed here, along with market indices such as the DJIA and S&P

19 List Panel MarketSmith Growth 250 Report The MarketSmith Growth Report is a premium report created by the portfolio managers at William O Neil + Co. The weekly list is generated through a highly complex screening process to identify stocks poised for significant growth. It was designed to save you time on your research routine, by pre-scanning our database and providing the best potential names week-to-week. The list will fluctuate between 100 and 300 names (based on market action) but will normally be around 250 ideas. Click for MarketSmith Growth 250 report. Questions? (800) reachus@marketsmith.com 17

20 List Panel MarketSmith Growth 250 Report and Pattern Recognition The combination of the Growth 250 and Pattern Recognition will allow you to view stocks that are currently building bases or are breaking out of bases each day. There are sub folders under the Growth 250 like Breaking Out Today and Near Pivot which are related to the Pattern Recognition algorithm. The alerts feature will even let you see the Breaking Out Today stocks as they occur in real-time. Access G250 - Pattern Recognition reports 18

21 Stock & Fund Screener Screens, Alerts, and Notes The Screen, Alerts, and Notes helps you filter the database for stock ideas, set price alerts, make research notes, and participate with other MarketSmith members to discuss and share investing research. You can create journal entries related to the specific chart you are viewing or find out what other MarketSmith members are saying via blogs and forums. This panel also lets you share your stock lists, charts, and analysis with other members in the MarketSmith community. Click the Blogs tab to read what others in the MarketSmith community are saying about a stock, or share your own observations. The notes feature allows you to annotate your analysis. Use Tool Help to get more details about the Screens, Alerts & Notes panel. Use annotations and advanced mark-up tools to keep track of your notes and mark-up the charts to your specifications. Click this tab to hide or expand the Screens, Alerts & Notes panel. Questions? (800) reachus@marketsmith.com 19

22 Stock & Fund Screener Screener Overview The MarketSmith Screener allows you to filter through our database of 10,000+ stocks and funds to find ones that meet a specific set of criteria. You can create simple filters for a quick look at what s moving in the market or create complex filters that can be used to spot potential investment candidates. Click on New to create a stock or fund screen. Set the criteria for your screen. Use MarketSmith Preset screens to get started. View screen results in the List Panel. Results appear dynamically as you modify criteria. 20

23 Stock & Fund Screener Customizing the Screener The MarketSmith screener can be customized to fit any investing style you prefer. With over 130 data points, the screener is designed to narrow your search for stocks that fit your investing style. Stock screening categories are neatly organized in specific folders to help you choose where you want to query our database. Just click on the header to open the folder to view all the items in that specific category. For example, by clicking on the SmartSelect tab, you are able to view the six criteria related to this folder and choose which items you wish to include in your screen. Set your screen parameters here. Select from over 100 criteria here. Questions? (800)

24 Stock & Fund Screener Preset and Shared Screens The screener gives members an opportunity to access predefined screens for stocks and mutual funds as well as benefit from the experience of their peer investors. You can browse members screens and share your own. You can also rate, comment on, and copy other members screens. In the Screener, click Browse Screens to access screens created by other MarketSmith members. Click MARKETSMITH Screens to browse Stock Guide screens created by MarketSmith education coaches. Tracked screens will be added to your list of screens. When you find something useful or interesting select Track Screen. 22

25 Stock & Fund Screener Index of Screenable Criteria SmartSelect Ratings (6) Earnings Per Share (EPS) Rating * Relative Price Strength (RS) Rating * Industry Group Relative Strength (Grp RS) Rating Sales +Profit Margins+ ROE (SMR) Rating Accumulation/ Distribution (Acc/Dis) Rating * SmartSelect Composite Rating Earnings (36) EPS Due Date % Change in Latest Quarter vs. Same Quarter Prior Year (-/+) * % Change in 1 Quarter Ago EPS vs. Same Quarter Prior Year % Change in 2 Quarters Ago vs. Same Quarter Prior Year % Change in 3 Quarters Ago vs. Same Quarter Prior Year EPS, Trialing 4 Qtrs EPS, Fiscal Year- Last Reptd Yr EPS, Fiscal Year- 1 Yr Ago EPS, Fiscal Year- 2 Yrs Ago EPS, Fiscal Year- 3 Yrs Ago EPS, Fiscal Year- 4 Yrs Ago EPS, Fiscal Year- 5 Yrs Ago EPS, Fiscal Year- 6 Yrs Ago % Change in Fiscal Year EPS vs. Prior Year, Last Reptd Yr % Change in Fiscal Year EPS vs. Prior Year, 1 Yr Ago % Increase in Next Quarter s EPS Estimate from Same Quarter Prior Year Actual EPS % Increase in Current Annual EPS Estimate vs. Last Reported Annual EPS % Increase in Next Year s Annual EPS Estimate vs. Current Annual EPS Estimate Sustainable Growth Model Projected EPS Growth % EPS Have Been Accelerating Over the Latest 3 Quarters (%) Annual EPS % Growth Rate of Last 1 Year Annual % EPS Growth Rate of Last 3 Years Annual % EPS Growth Rate of Last 5 Years Annual % EPS Growth Rate of Last 5 Years Percent Rank Earnings Stability Average EPS % Change for Last 2 Quarters Average EPS % Change for Last 3 Quarters Average EPS % Change for Last 4 Quarters Average EPS % Change for Last 5 Quarters Average EPS % Change for Last 6 Quarters Latest Quarter % Earnings Surprise EPS Trailing 4 Qtrs Greater Than EPS, 4 Yrs Ago EPS, Lst Fiscal Yr Greater Than EPS, 4 Yrs Ago EPS, Trailing 4 Qtrs Greater Than or Equal to EPS, Lst Fiscal Yr EPS % Change Current Quarter Greater Than 3-Yr EPS Growth EPS % Change Current Quarter Greater Than or Equal to 5-Yr EPS Growth Sales (12) Current Total Annual Sales (mil) % Change Latest Quarter s Sales vs. Same Quarter Prior Year * % Change in Latest Fiscal Year Sales vs. Prior Year Sales Have Been Accelerating Over the Latest 2 Quarters (%) Sales Have Been Accelerating Over the Latest 3 Quarters (%) Annual % Sales Growth Rate of Last 3 Years Annual % Sales Growth Rate of Last 5 Years Average Sales % Change for Last 2 Quarters Average Sales % Change for Last 3 Quarters Average Sales % Change for Last 4 Quarters Average Sales % Change for Last 5 Quarters Average Sales % Change for Last 6 Quarters Industry & Sector (3) Company s Industry Group Rank Industry Group Name Broad Sectors Shares & Holdings (9) Shares Outstanding (1000 s) Market Capitalization (mil) Enterprise Value (mil) Sponsorship Rating % of Stock Owned by Mutual Funds % of the Number of Mutual Funds Owning for Current Quarter vs. Previous Quarter Sponsorship, Mutual Funds Holding Position, Last Reptd Qtr * % of Stock Held by Management % of Float Held by Institutions Less Than Database Median Price & Volume (26) Current Price * Current Price in Relation to 52-Week High * Price % Change Price $ Chg RS Line Making New High RS Line Making New Low Relative Strength, 3 Month Relative Strength, 6 Month Timeliness Rating Price, % Change vs. S&P 500, 26 Weeks Volume Intraday (1000s) Current 50-Day Average Volume (1000s) * % Increase in Current Day s Volume vs. 50 Day Average Volume Up/Down Volume Ratio Current 50-Day Average Daily $ Volume (1000s) Current Price % Above or Below 50-Day Moving Average Price Current Price % Above or Below 200-Day Moving Average Price % Price is Up in the Current Week % Price is Up in the Latest 1 Month % Price is Up in the Latest 3 Months % Price is Up in the Latest 6 Months % Price is Up in the Latest 12 Months % Price is Up for Year to Date Current Alpha Current Beta Average True Range (30 Days) Margin & Ratios (31) After Tax Profit Margin (Most Recent Reported Quarter) Average After Tax Profit Margin (Last 2 Quarters) Average After Tax Profit Margin (Last 3 Quarters) Average After Tax Profit Margin (Last 4 Quarters) Average After Tax Profit Margin (Last 5 Quarters) Average After Tax Profit Margin (Last 6 Quarters) Companies With Accelerating After Tax Profit Margins During Latest 3 Quarters (%) Pre-Tax Annual Margins (Latest Fiscal Year Reported) Operating Margin Greater Than or Equal to Industry Median Profit Margin Greater Than or Equal to Industry Median Cash Flow vs. EPS % Difference- Last Reported Quarter Cash Flow vs. EPS % Difference- Last Reported Year ROE (Latest Fiscal Year Reported) ROE, 5-Yr Average Debt % (Latest Fiscal Year Reported) Estimated P/E Going Out 1 Year Current Trailing 12 Month P/E P/E vs. Current S&P 500 P/E P/E Percent Rank P/E Number Rank in Group P/E Less Than 5- Year Average P/E to Earnings Growth Rate (PEG) P/E to Earnings Growth Rate Plus Dividend Yield (Dividend-Adjusted PEG) Current Price to Sales Ratio Current Price to Book Value Current Price to Cash Flow Current Enterprise Value to Free Cash Flow Current Ratio Current Yield % Long-Term Debt to Working Capital Ratio Total Liabilities/Total Assets Ratio Less Than Industry Median General Stock Criteria (12) Exchange ADR ETF/Closed-End Fund ETF Stock has Options IPO Date Date of Incorporation Company Headquarters - City (US and Canada only) or Country Company Description Headquarters - State or Province New CEO in Latest 12 Months Company Was Featured in an IBD Article During Last 2 Years Questions? (800) reachus@marketsmith.com 23

26 Support Resources MarketSmith Tutorial To help you get started, we suggest using the MarketSmith Tutorial to guide you through key features on the stock charts and screener. You can access tutorials by clicking the Tool Options ( ) icon in the top right corner of the stock chart or screener panel. Once the Tutorial is launched, the Welcome tab will appear in the middle of the screen. Access the Tool Option menu to enable or disable the tutorial at any time. To contact a product coach, click on the orange Contact My Coach button. 24

27 Support Resources MarketSmith Tutorial Select the Self-Guided Tour tab to begin. The four major areas of MarketSmith will be highlighted, and the location of each area is marked with a corresponding number. 1. Stock Chart 2. Screens, Alerts & Notes Panel 3. List Panel 4. Related Information Panel Maximize the Screens, Alerts & Notes panel by clicking here. Self-Guided Tour For more details on each feature, click here to view a help map of the feature. Questions? (800) reachus@marketsmith.com 25

28 Support Resources MarketSmith Tutorial The How To tab provides step-by-step instructions. Learn how to find new stock ideas, organize your watchlists, identify chart patterns, and much more. How To For further guidance, use the Hover Help function in Tool Options to reveal a short description of each button function. Access the Tool Option menu to enable or disable the Hover Help function at any time. 26

29 Support Resources Help Menu Look for the ( ) icon to access the Help Menu and activate a map of MarketSmith s features. Click on any highlighted portion of the map to get a detailed description of that MarketSmith feature. The Help Menu icon ( ) can be found in the upper right side of all main feature panels in MarketSmith. Notes & Discussion Click the ( ) to access the Help Menu for each feature. Stock Charts List Manager Related Information Click a highlighted area for detailed feature descriptions. Questions? (800) reachus@marketsmith.com 27

30 Support Resources Education and Support MarketSmith has many more resources to help you become a successful investor. To learn more about the helpful features of MarketSmith, check out the Learn and Support sections on our website. Each area provides important information to make you a MarketSmith. Learn all about MarketSmith from the detailed instructions provided for each feature. Learn feature use and navigation with the Video Tutorials. View exclusive educational webinars. Use the SUPPORT section to answer general investing questions and solve technical issues. 28

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32 Applying MarketSmith

33 Applying MarketSmith Chapter 1 Identify Winning Stocks 32

34 Chapter 1: Identify Winning Stocks One of the keys to continual success in the market is being able to identify which stocks have the potential to become big leaders in the next bull market cycle. History has proven that leading stocks will display similarly outstanding fundamental and technical action BEFORE beginning their tremendous price runs. MarketSmith charts are designed to help an investor quickly assess a stock s fundamental and technical strengths. The chart s efficiency and our platform's access to institutional quality data are two essential features that help you identify stocks with the greatest potential. In this section, we explain how to assess a company s fundamental and technical data, before deciding which stocks to buy. 33

35 Applying MarketSmith How Do I Find Stocks That Will Rise in Price? Imagine capturing Microsoft (MSFT) in 1989 at the very start of one of its big moves. This big winner and many other leading stocks posted huge earnings and sales before their tremendous price appreciation. Confirmation of strong fundamentals can also include return on equity (ROE) and margins (pretax and aftertax). When a company is exhibiting strong fundamentals, it is usually leading its industry by offering an innovative product or service. To increase your chances of owning stocks with excellent profit potential, your first step is to search for stocks with strong fundamentals. In our models of the 600 best-performing stocks from 1952 to 2001, three out of four showed earnings increases averaging more than 70% in the latest publicly reported quarter before they began their major price advances. William J. O Neil Term: Fundamental Analysis The assessment of a company s financial strength and potential for growth by focusing on earnings, sales, and other data derived from a company s financial statements. This section covers the basics of fundamental analysis, which includes a review of a company s financial health, management, and competitive advantages. We see the decision to buy a stock as roughly 70% fundamental analysis and 30% technical analysis (covered later). In the stock market, fundamental analysis allows you to identify companies that are leading their industry and growing their earnings. A time-saving way to evaluate stocks using MarketSmith is to use our O Neil proprietary ratings and rankings on daily and weekly charts. MarketSmith displays proprietary fundamental ratings that allow you to easily compare a stock against all other stocks in the database on a scale of 1-99 (99 being best) or A-E (A being best). Below you will find a sample of this data. For more definitions, refer to the Chart Legend link located below the charts in the MarketSmith tool. 34

36 Chapter 1: Identify Winning Stocks Key Ratings: EPS Rating: This stock's earnings data is outperforming 99% of all stocks in our database. SMR Rating: This stock s Sales + Profit Margins + ROE (SMR) data is in the top 20% of all stocks in our database. Acc/Dis Rating: Tracks the degree of institutional buying and selling of a stock over the last 13 weeks on an A-E scale. Composite Rating: Combines all 5 SmartSelect Ratings into one. Fundamental Data Fundamental data on daily and weekly charts allow you to quickly evaluate a stock's potential. What Makes a Stock s Price Rise? Without increased earnings, there is little reason for a stock to go up in price. MarketSmith offers eight quarters and nine years of earnings history (including estimates for the next two fiscal years). Annual Earnings Quarterly Earnings Earnings History Strong annual and quarterly earnings often drive rising stock prices. When looking for potential winning stocks, we are always looking for something new, whether it is new products, new services, or new management, because something new is usually tied to an increase in company earnings. For example, Netflix (NFLX) had two big runs. The first was in 2003 with the release of rental DVDs, and the second was when it introduced online streaming. Questions? (800) reachus@marketsmith.com 35

37 Applying MarketSmith Familiarizing yourself with a stock s earnings history and story is crucial to increasing your conviction in its potential. Let s focus on Netflix (NFLX) in NFLX had seven quarters of outstanding quarterly EPS and sales and it was able to advance over 100% during this time. If you assumed that you missed the majority of NFLX s move, you were wrong. Hint You can screen for accelerating earnings in the MarketSmith Screener. Accelerated Earnings and Sales Netflix exhibited outstanding increases in earnings and sales in the quarters prior to its 394% run. In fact, our analysis of the greatest stocks revealed that almost every stock had an acceleration of earnings growth sometime in the 10 quarters before the stock went on its huge move. NFLX had four quarters of accelerating earnings and sales within the seven quarters previous to its first run. It went on to advance another 394% in 17 months. Netflix (NFLX), December 2010 New Innovations Apple's earnings and sales skyrocketed after the launch of the ipod music player in Sometimes that something new is a product so innovative that it changes the way people live and work. Sometimes, though, an innovative product needs time and another catalyst for it to gain mass appeal. For example, the ipod was introduced in 2001, but it was the launch of the itunes Music Store with 200,000 songs at $0.99 that made the ipod a worldwide sensation, creating a surge in Apple s earnings and sales. That surge in profits allowed Apple to innovate further and create the iphone and ipad, two more worldwide bestsellers. Reinvesting those profits was key to AAPL becoming one of the best-performing stocks of the past 10 years. What were Apple s fundamentals before the stock broke out and went up over tenfold in price? Apple (AAPL) December

38 Chapter 1: Identify Winning Stocks Even though the portfolio managers who helped develop MarketSmith are growth-oriented, they were emphatic about designing it as a style-agnostic platform, equally relevant to all types of investors. Thus MarketSmith has a full range of fundamental criteria appropriate for you to make an informed investing decision according to your style. To speed your analysis, our Checklists (found in the Related Information Panel) have various sets of preselected criteria to help you quickly analyze individual stocks. Stock Checklist MarketSmith Stock Checklist Customizable Stock Checklists help you quickly analyze individual stocks. What to Buy? Don't Overlook Fundamental Stock Analysis For this webinar and others, please visit: marketsmith.com/learn/webinars.aspx Questions? (800) reachus@marketsmith.com 37

39 Applying MarketSmith How Do I Read a Stock Chart? Chart Patterns Reading chart patterns would have helped you buy Apple (AAPL) in 2004, before it began its 20-fold price advance. Term: Technical Analysis The assessment of a company s stock price strength and direction, using price and volume (and/or indicators derived from price and volume) as seen on a stock chart. Term: Institutional Accumulation Refers to the shares of a company bought by an institutional investor (mutual funds, banks, pension funds, insurance companies, etc.) One of the key things to look for in a stock chart is a chart pattern. A chart pattern, also known as a consolidation area, is where the stock s price action takes a common path that meets the specific parameters of one of six patterns. Even the best stocks will take a break from their ascent to build these chart patterns, which are made when a stock falls slightly in price or moves sideways meaning the price doesn't rise or fall much. A stock breaking out from a pattern is a technical signal to buy. Volume data on a stock chart is another way to measure whether a stock is strong, healthy, and under institutional accumulation (big funds are buying it) or whether the stock is weak, behaving abnormally, and under institutional distribution (big funds are selling it). It is difficult to track institutional actions without consulting a chart, but the big institutional money cannot hide its actions from the chart. Moreover, charts help you follow hundreds, even thousands of stocks in a highly organized, time-saving way. Throughout stock market history, stocks that seem too high in price often go higher. Ideally, we are looking for stocks in an uptrend that are consolidating their gains constructively. This constructive action can be seen in the chart patterns identified in the following pages. 38

40 Chapter 1: Identify Winning Stocks Chart Patterns Learning to identify these chart patterns (consolidation areas) will help you determine optimum buy and sell points. Remember: The institutions are creating these patterns with their trading activity. By understanding patterns, you will have greater insight into the actions of large players. By understanding patterns, you will have greater insight into the actions of large players. MarketSmith simplifies this process by highlighting chart patterns using our Pattern Recognition feature. For newer investors, seeing these patterns helps them more easily identify stock trends. For more experienced investors, Pattern Recognition acts as a time-saving feature by performing calculations such as the stock s base stage, length and depth of base, depth of handle, pivot point, and current percent from pivot. Greatest Winners: Use the change date feature in MarketSmith to review these stocks on dates displayed for classic examples of recognizable chart patterns. NFLX: 8/10/2010 AAPL: 3/4/2004 CMG: 9/1/2010 PCLN: 1/5/2011 XRX: 4/5/1965 GOOG: 4/22/2005 BIDU: 5/14/2007 SCHW: 10/15/1998 AMGN: 11/12/1990 The Importance of Chart Patterns For this webinar and others, please visit: marketsmith.com/learn/webinars.aspx Questions? (800) reachus@marketsmith.com 39

41 Applying MarketSmith Cup With Handle Base Base Length: Minimum of 7 weeks Base Depth: 20% - 30% Handle Depth: 12% - 15% Pivot Point: High of the handle Weekly Chart Daily Chart Saucer With Handle Base Base Length: Minimum of 7 weeks Base Depth: 12% - 30% Handle Depth: 12% - 15% Pivot Point: High of the handle Weekly Chart Daily Chart Double Bottom Base Base Length: Minimum of 7 weeks Base Correction: < 50% from peak Pivot Point: Breakout through middle of W Weekly Chart Daily Chart 40

42 Chapter 1: Identify Winning Stocks Base Length: Minimum of 5 weeks Base Correction: < 15% Pivot Point: Left-side high of base Flat Base Weekly Chart Daily Chart Base Length: 2 to 4 weeks Base Depth: 0% to 20% Pivot Point: Left-side high of base IPO Base Weekly Chart Daily Chart An area of resistance that fails to form a more defined base Consolidation Weekly Chart Daily Chart Questions? (800) reachus@marketsmith.com 41

43 Applying MarketSmith Cup Base Base Length: Minimum of 7 weeks Base Depth: 20%-30% Pivot Point: Left-side high of base Weekly Chart Daily Chart Ascending Base 3 pullbacks from 10% to 20%, with each low-point during the selloff being higher than the preceding one Weekly Chart Daily Chart 42

44 Chapter 1: Identify Winning Stocks Historical Comparisons You can train your eye to recognize chart patterns by studying big winning stocks of the past, using the Change Date feature. MarketSmith encourages this education process by offering a database of charts dating back over 50 years. By studying the chart patterns of previous big winners such as Xerox (XRX), we can train our eyes to recognize patterns in future big winners. For example, look at the similar breakouts of Apple and Xerox below. Before Their Breakouts Xerox (XRX) April 1963 Apple (AAPL) March 2004 Recognizing Chart Patterns Historical comparison of Xerox and Apple before and after their breakouts 1 Strong Prior Uptrend; 2 Constructive Action (Base Building); 3 Powerful Breakout. Subsequent Moves Xerox (XRX) November 1963 Apple (AAPL) February 2005 Questions? (800) reachus@marketsmith.com 43

45 Applying MarketSmith Term: Supply The amount of a particular item that is available for sale in a given market. In the stock market, it refers to how many shares are currently being sold by investors. When supply exceeds demand, prices fall. Term: Demand The amount of a particular item that is desired for purchase in a market. In the stock market, it refers to how many shares are currently being bought by investors. When demand exceeds supply, prices rise. Why Follow Institutional Investors? Each trading day, the majority of market volume is coming from the institutions (i.e., mutual funds, hedge funds, pension funds, etc). The bottom line is that the institutions are the ones who move the market, not individual investors. Institutional buying and/or selling pressure can greatly influence the price of a stock. Keep in mind that stocks represent fractional ownership in a company. You don t own the company, you own the stock. And that stock price can reflect or diverge from how strong the company is in your opinion. Analyzing a chart to measure the supply of a stock vs. demand for it, will help to keep your opinion or emotional connection to the stock out of the equation. Track Price Tool To access the Track Price tool in MarketSmith, simply leftclick and hold down the button on your mouse. You can move the cursor over particular price bars for detailed price and volume information. Track Price Tool Using Volume to Gauge Supply and Demand For this webinar and others, please visit: marketsmith.com/learn/webinars.aspx 44

46 Chapter 1: Identify Winning Stocks It is important to be aware of what the institutions are doing. They are the ones with the resources to thoroughly research stocks that have the greatest chance of success. Institutions will often accumulate a position over a period of weeks or months. The great news is that, during this time, you can see the activity of institutions by observing fluctuations in a stock s volume. MarketSmith makes it easy for you to detect above-average trading volume with its 50-day moving average volume line. Average trading volume for Apple might not be the same as Google s. To determine the average trading volume, MarketSmith calculates the trailing 50 days of average trading volume for each stock. Ideally, on days your stock is up, its volume will be up, and on down days we prefer to see lighter trading volume. On a key day, like a breakout day from a base, we want volume to be unusually high. Historically some of the biggest stock market winners had volume two to three times greater than normal on their breakout day. Historically some of the biggest stock market winners had volume two to three times greater than normal on their breakout day. When researching potential stocks for purchase, we are trying to capture those stocks with a great chart pattern, outstanding fundamentals, and a large increase in volume as the stock moves up through the pivot price (buy point). This is the tell for big institutional demand. Unfortunately for us, the institutions don t telegraph their intentions when they are trying to accumulate a stock. However, following price and volume allows us to observe their actions in real time. The examples on the following page show stocks that exhibited large volume on breakout days, before they made large price advances. Questions? (800) reachus@marketsmith.com 45

47 Applying MarketSmith Breakout Days The day when a stock moves up in price through the pivot price (buy point). Breakout Days Chipotle Mexican Grill (CMG) September 2010 Google (GOOG) April 2005 Greatest Winners Use the change date feature in MarketSmith to review these stocks on dates displayed for textbook examples of chart pattern breakouts. CSCO: 10/23/1990 PTR: 4/28/2003 BRCM: 11/3/1999 GOOG: 10/21/

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49 Applying MarketSmith Chapter 2 Time the Market 48

50 Chapter 2: Time the Market In the stock market, knowing whether the major indices are in an uptrend or a downtrend is crucial, because three out of four leading stocks will follow the general trend of the market. Ideally, it is best to be invested only when the overall market is in an uptrend and to be in cash (on the sidelines) when the market is in a downtrend. In this section, we will discuss how you can improve your odds for success in the stock market by knowing what the market is doing now. Rather than trying to predict where the market is headed, we watch for signs that help us determine whether the market is currently in an uptrend or downtrend. We then take specific, appropriate actions. 49

51 Applying MarketSmith General Market Analysis Many stock market observers believe market timing is impossible. However, having studied every market cycle since the late 19 th Century, we have determined that it is possible to successfully time the market using a set of investing rules. While stock investing can be tremendously rewarding, it can also be financially and emotionally difficult to handle. After the dot-com bubble in 2000, many unsuspecting or ill-informed investors lost 50-80% of their portfolio values. The 2008 financial crisis also caused a severe market downturn. After sharp corrections like 2008's, many individual investors lost their confidence and never returned to investing in stocks. This is unfortunate, because there are ways to avoid going off the cliff, which you ll better understand after reading this section. Term: Bull Market During the average Bull Market, the major indices rise 160% in 3½ years. Term: Bear Market During the average Bear Market, the major indices fall 43% in 1½ years. On the opposite end of the spectrum, it s easy to get caught up in a strong bull market and miss signs that the market may be topping, only to watch hard earned gains evaporate. Good market analysis can help protect you from both of these natural human reactions. Search for Trends in the Stock Market When conducting market analysis, your aim is to spot signs of either strength or weakness in market action, so that you can pinpoint the market s overall trend. With some practice, you ll start to develop a feel for what a healthy market looks like, as well as one that isn t acting right. Many market observers spend their time focusing exclusively on analysis of economic conditions to predict where the market is headed. While knowledge of economic fundamentals can be useful, a singular focus on this approach often proves deficient, because the market tends to lead the economy, as opposed to the economy leading the market. Thus, most measures of economic activity are inadequate for identifying key market turning points. 50

52 Chapter 2: Time the Market Instead of relying strictly on an analysis of the business climate, we rely on two key indicators of a potential trend change. The first is when indices show signs of weakness, indicating that demand for stocks is waning. The second is when the indices show signs of strength, signaling that money is coming into the market. We call these signals Distribution Days and Follow-Through Days, respectively. If you learn to identify these signals, you ll be investing in line with the overall market trend. Distribution: The Selling Footprint of Institutions Eventually, every market uptrend reaches a point where selling activity overtakes buying activity. We call this distribution. A Distribution Day occurs when an index closes down on higher volume compared to the previous day. Market Top, Nasdaq Composite March 27, 2012 Distribution Days A Distribution Day occurs when a major index is down 0.2% or more, and the volume is higher than the previous day. Keep a running tally of distribution days on the major index charts. Questions? (800) reachus@marketsmith.com 51

53 Applying MarketSmith Our studies of every market top going back more than 50 years showed that five or six days of distribution over a span of four to five weeks is sufficient to turn a market uptrend into a market downtrend. Five or six days of distribution over a span of four to five weeks is sufficient to turn a market uptrend into a market downtrend. After spotting one or two Distribution Days on a major index (over a few weeks time), pay attention to the major market index charts on the following days. If there comes a second and/or third day of distribution, you should start to prepare for the market to change direction. You may have already sold a stock or two. By the fifth day of distribution in five weeks (or fewer), you should be on alert for the possibility that the market is entering a correction. At the same time you re seeing distribution in the market indices, you ll also likely see leading stocks the stocks that have been the best price performers in that market cycle show signs of topping. If you see the price of leading stocks dropping, you have another reason to suspect that the market trend is changing and that the market is weakening. After you ve spotted signs of market weakness, you need to take action. Curtail new stock purchases. Consider raising some cash by selling your weakest stocks and get off margin. If the market continues to weaken, you need to continue to sell stocks and move to cash. You never know how far the downtrend will go. By taking defensive action, you re protecting yourself against the big losses possible during severe corrections. In a downtrend, we don t want to lose sight of the best stocks. When the market is correcting, even the best merchandise will have a hard time going up in price. Picture a basketball being held underwater. As soon as you let go of that ball it will shoot to the surface in an instant. The best stocks in a market downtrend are just like basketballs being held underwater by the market. As soon as the pressure of the market is lifted, these stocks will move into new high ground very quickly. Your MarketSmith tool allows you to search for those stocks that are holding up the best with the screening option: Relative Strength (RS) line hitting new high. Managing Risk Through Market Directional Analysis For this webinar and others, please visit: marketsmith.com/learn/webinars.aspx 52

54 Chapter 2: Time the Market I tried to detect those stocks that resisted the decline. I reasoned that if they could swim against the stream, they were the ones that would advance most rapidly when the current changed After a while, stocks began to resist the downward trend. They still fell, but while the majority dropped easily, following the mood of the general market, these stocks gave ground grudgingly. Nicholas Darvas, How I Made Two Million Dollars in the Stock Market Follow-Through on a Solid Market Rally Eventually all corrections end, and new uptrends begin. Once the market enters a downtrend, continue to monitor it closely. At some point, it will rally and recover for a few days. Many of these rallies will be fake-outs. Wait for confirmation that there has been a change in trend to the upside. This comes in the form of an explosive up day, a Follow-Through Day, signaling that the market s trend has changed. Market Bottom, Nasdaq Composite March 17, 2003 Follow-Through Day Mark rally Follow-Through days on your charts to signal a new uptrend. Questions? (800) reachus@marketsmith.com 53

55 Applying MarketSmith Term: Follow-Through Day A Follow-Through Day occurs when a major index is up at least 1.4% and volume is higher than the previous day. This typically occurs 4 to 7 days after the rally begins. A Follow-Through Day usually happens on the fourth through seventh days of an attempted rally, but it sometimes can come on the tenth day or later. On this day, one key market index closes up a powerful and decisive amount, at least 1.4% or more, with trading volume higher than the day before. It is important to remember that when the market follows through, the financial headlines may still be negative. Most people won t believe in the rally. Fear is natural in this case, so it s crucial that you focus on what the market is actually telling you not your emotions or the news cycle. While no new bull market has started without a Follow-Through Day, not every Follow-Through Day leads to a change in market trend. A Follow- Through Day does not mean you should plow in with 100% of your portfolio. But it does give you the go-ahead to carefully review your Watch List of high-quality stocks with a view to perhaps making a small purchase of those at, or approaching, proper buy points. You may want to spread out purchases, letting the individual stock s price action confirm that the market s trend has truly changed. Historical Precedent Analysis Analyzing historical charts can be a helpful guide for interpreting current and future market trends. On the next page you will find examples of stocks that followed the market at critical tops and bottoms. Market Tops & Bottoms Use the Change Date feature to conduct your own analysis of historical market events. S&P 500 (Top): 7/20/1998 S&P 500 (Bottom): 10/15/1988 DJIA (Top): 9/03/1929 DJIA (Bottom): 8/17/

56 Chapter 2: Time the Market Market Top: March 10, 2000 Nasdaq Composite JDS Uniphase (JDSU) Most stocks follow the market Examples of stocks that followed the market at critical tops and bottoms. Market Bottom: August 17, 1982 Dow Jones Industrial Average Pulte Group (PHM) Questions? (800)

57 Applying MarketSmith Chapter 3 Buy Right, Sell Right 56

58 Chapter 3: Buy Right, Sell Right Buying and selling stocks can be a very expensive endeavor if you don t have sound rules to help you navigate the market. Most investors who struggle in the market do so because they make buy and sell decisions based on their emotions (usually fear or greed), which leads to buying at the top and selling at the bottom. This section covers optimal times to buy and sell stocks based on 50 years of equity research at William O Neil + Company. These investment rules are based on how the market actually works not on our opinions. Learning these concepts will help you participate more fully and confidently in market uptrends and avoid catastrophic downtrends, like we saw in 2000 and Finally, we conclude this section with a brief overview of portfolio management and its importance to long-term success in the stock market. 57

59 Applying MarketSmith Stock Selection The most important factor in buying is market direction. As previously mentioned, most stocks will follow the trend of the overall market. In a correction, or bear market, you should have raised cash (sold your stocks) to protect your capital, so you can invest it in the next uptrend. During an uptrend, we look for stocks that have the strongest fundamentals and best technical setups. When considering the fundamental and technical characteristics of a stock, a good rule of thumb for buying decisions is to base them 70% on fundamentals and 30% on technicals. The price action and chart pattern are important to us, but no stock is going to double or triple because of the chart. Big earnings and strong sales drive stock prices higher. In the stock market, there is the best price (the low for which it is impossible to know at the time) and the RIGHT PRICE. We are trying to buy into a position at the correct point on the chart not cheaply, early, or by happenstance. That price is the point on the chart known as the pivot point. Track Price Tool The volume % change figure will update as the trading day progresses. Be aware that the volume is usually abnormally large in the beginning of the day. So take that into account with your analysis. The longer the market has been open, the more accurate that volume % change figure will be. Track Price Tool 58

60 Chapter 3: Buy Right, Sell Right There are two key attributes of pivot points that must exist in order to buy a stock. First, a stock s price must move upward through the pivot point. Second, we want to see a substantial increase in the normal trading volume for that stock. Volume can be identified throughout the trading day with the track price tool in MarketSmith. Term: Pivot Point The point in a chart pattern where the price needs to break through before considering it a buy point. Buying Right You can actually buy a stock too soon as well as too late. To avoid using a faulty buy point, wait for the stock to break out of the base on a large increase in volume. If you buy too soon, the stock may never break out, and you will be stuck with a stock that simply goes sideways or lower, giving no profit or only losses. Faulty Buy Points Extended from base, DO NOT BUY Never breaks out, DO NOT BUY Examples of faulty buy points Beware of buying too early or too late. Hint If you are new to this, use Pattern Recognition as your guide to determine whether the stock is extended. Questions? (800) reachus@marketsmith.com 59

61 Applying MarketSmith To avoid buying too late, we use a 5% range just above the stock s pivot point to identify our buying area. Buy the stock as close to the pivot as possible, after it breaks out. Sometimes a stock moves quite fast, e.g., after an earnings announcement (see Important Note), that's why daily monitoring of stocks close to a buy point is so important. Important Note Earnings releases can result in a dramatic price action for a stock, so you should be prepared for such announcements. The earnings release date for every stock in our database is located in the bottom right corner of the daily chart. If the date is displayed with an "e," the company has not yet announced the EPS due date, and we are displaying an estimated date. Earnings release date Earnings release dates are displayed in the bottom right corner of MarketSmith daily charts. EPS Due Date Buy Points Use the Change Date feature to conduct your own analysis of historic buy points. BIDU: 7/15/2009 BRFS: 12/16/2003 MSFT: 9/13/1989 CELG: 9/27/2013 WFM: 3/10/1993 ADBE: 10/14/1986 Using Relative Strength to Identify the Next Cycle of Leaders For this webinar and others, please visit: marketsmith.com/learn/webinars.aspx 60

62 Chapter 3: Buy Right, Sell Right Selling Would you drive your car without the brakes? Would you own a home without insurance? Our number one investing rule is to cut ALL losses at 7-8%. This rule insures you against catastrophic losses to your portfolio. Our number one investing rule is to cut ALL losses at 7-8%. Cutting losses is the one and only rule of the markets that can be taught with the assurance that it is always the correct thing to do. Gerald Loeb, The Battle for Investment Survival We buy based on fundamentals and technicals, but we sell based on technicals alone. Remember, the stock market is anticipating what the fundamentals (of both companies and the economy) will be in six to nine months. We sell based on technical action, rather than wait for fundamentals to deteriorate. If you see one of these sell signals, sell and don t wait to learn why it is going down. A key defensive signal is a break of the 50-day moving average line on huge volume. The 50-day moving average is a level at which institutions will likely support their positions. The best stocks in the market often test this line during their uptrend, but they will rarely fall on huge volume. If a stock breaks the 50-day line on huge volume, it could be a sign that institutions are exiting their positions. This is a crucial sell signal that could lead to further downside, and you will want to protect yourself immediately against losses. We buy based on fundamentals and technicals, but we sell based on technicals alone. Term: Defensive Sell Rules Signs to sell a stock while prices are falling. Another defensive sell signal is the largest one-day price drop. Historically, after an extended price advance, if the stock takes its largest one-day price move down since the beginning of the move, consider selling. It is vital not to hesitate during this type of gap down because the stock can go much lower in a short amount of time. Don t hope and pray for a bounce, and even more important, do not add to a losing position. Cut your losses and protect your portfolio. Questions? (800) reachus@marketsmith.com 61

63 Applying MarketSmith OpenTable (OPEN) OpenTable broke through the 50-day moving average line on heavy volume at the start of its decline. OpenTable (OPEN) September 2011 Knowing when to take a profit Term: Offensive Sell Rules Signs to sell a stock while prices are rising. One offensive sell signal is to take profits when your stock has gained 20-25%, rather than sit through a potential new base. Based on history, most growth stocks rise 20-30% before building a new base or correcting again. The only exception to this sell signal is if the stock has unusually strong fundamentals and price action, in which case you may want to hold onto your shares for a longer period of time. For example, Herbalife (HLF) was up more than 20% out of the base before plunging: 62

64 Chapter 3: Buy Right, Sell Right Herbalife (HLF) June 2012 Lock in Your Gains Take profits when the stock price climbs 20-25% above your purchase price. By taking profits in this 20-25% range, we accomplish two things. First, it frees up capital you can use to buy another stock more likely to rise in price, while the stock you sold is building a base (or worse, corrects and comes back down). Second, it allows you to pay for the losers. Using proper money management, you can be wrong three out of four times, and your portfolio will remain intact. If you can t be right more than one in four times then you might want to study your past buys and sells to analyze why. Using proper money management, you can be wrong three out of four times, and your portfolio will remain intact. For further study, refer to the selling chapters in William J. O Neil s book, How to Make Money in Stocks. Note: If you are interested in exploring more sell signals, please contact your product coach to discuss historical examples. Mock Portfolio XYZ -7% ABC -7% DEF -7% GHI +25% Overall +4% Questions? (800) reachus@marketsmith.com 63

65 Applying MarketSmith Managing Your Portfolio You ve analyzed the market to identify its current trend. You ve analyzed each stock on both a fundamental and technical basis to identify the best possible times to buy. Now, we discuss techniques to manage your portfolio to further lock in gains and avoid severe losses. It s important to remember that your objective in the market isn t simply to be right; it s to make big money when you are right. It s important to remember that your objective in the market isn t simply to be right; it s to make big money when you are right. Two portfolio management techniques discussed in this section may help you achieve that goal: concentrating your purchases and using proper follow-up buys. Concentrate Your Purchases When it comes to the stock market, it s better to put your eggs in a few baskets and watch those baskets very closely. Owning too many stocks makes it difficult to understand them all or stay on top of their fundamental and technical changes. Did diversification protect people in 2000 or 2008? When the market signals the environment is changing, a broad portfolio of stocks can slow you down when you should be raising cash (selling). We diversify by spreading our purchases out over time and by never concentrating too heavily in one industry group or sector. Consider putting a strict limit on the number of stocks in your portfolio. Then enforce this limit by refusing to add a new stock until you ve sold one you already own. If, for example, you ve decided to own no more than 10 stocks, sell the least attractive of the 10 before making a new buy. How do you know which is your least attractive stock? Easy, the one in which you are up the least or down the most. It s a good idea to set up a portfolio in MarketSmith with the names you currently own. For our purposes, we ll call this list My Holdings. Monitor your holdings list daily, and pay attention to things like Relative Strength and the price-volume action on the chart to understand which stocks are showing strength or weakness. 64

66 Chapter 3: Buy Right, Sell Right Building a Position When you buy a new stock, think about not committing your entire position in one decision. Instead, commit incrementally, making your stock prove its strength by advancing in price. Say your full position for a stock would be $10,000. For your first position, you could contribute $5,000 at the start and then, if the stock continues to advance, add additional, smaller amounts until you ve reached your full position. We call this technique pyramiding or averaging up, because after a larger initial purchase, you make smaller ones as the stock advances. It s important that you buy fewer shares with your second and third purchases to avoid running up your average cost. Also, avoid making follow-up buys once the price of the stock is more than 5% above its pivot point. 20% Purchase #3 30% Purchase #2 50% Purchase #1 Price Scale +2.5% +2.5% Buy Point (Pivot Price) Pyramiding Purchases A strategy for incrementally scaling into a position as prices rise. Force Feed Your Winners Of every 10 stocks you buy, only one or two will likely be outstanding performers. Your goal is to allocate the most capital to your best stocks. Say the market has just entered a new rally, and you buy five or six stocks. As the rally continues, consider selling the stocks in which you are down or the ones that are not fully participating in the uptrend. Then use that money for follow-up buys in the stocks you own that are taking full advantage of the uptrend. This force feeding method of money management reminds you to move your money into your best-performing stocks. Of every 10 stocks you buy, only one or two will likely be outstanding performers. Your goal is to allocate the most capital to your best stocks. Questions? (800) reachus@marketsmith.com 65

67 Applying MarketSmith Common Portfolio Management Mistakes Not Keeping Your Watch List Up-To-Date Even in a bear market, it s important to always have a list of stocks you would buy in a more positive market environment. The first stocks to break out during a new bull market are often like a coiled spring. These stocks have enough institutional support that they don t correct as much as the general market, but the macro weakness prevents them from advancing much. When the general market pressure eases, these stocks can move up in a hurry. Term: Shake Out When a short-term loss on a stock purchase forces an investor to sell shares during a temporary pullback that is part of a longer term uptrend in the stock's price. If the market begins a new rally and you don t have a watch list of stocks to buy, you will likely miss a good portion of this advance. In addition, once these stocks move past a proper buy point and you attempt to buy late, you risk being shaken out in a normal market correction. Not Recognizing New Leadership It s human nature to focus on what we know. Perhaps, tech stocks made you a lot of money in a previous market cycle, so you know those stocks well. That s great, but that doesn t mean tech stocks are necessarily the best stocks to own right now. Pay attention to the industry groups that are leading the market. This is an even more important point to remember at an individual stock level. There are always new companies with new products and services shaking up the economy. Sometimes an old company under new management will reinvent itself. Don t just focus on the old leaders. Keep an open mind to new, innovative companies. Investing in Companies You Don t Understand Evaluating charts and fundamental data is an important part of your analysis process, but if you take the time to get to know the companies you are considering for investment, you ll be better equipped to interpret the information. If you know the ins and outs of a company, you should be better able to ride through a normal correction in a stock without getting shaken out. At the same time, you ll be more likely to spot when a company s period of rapid growth may be nearing an end. 66

68 Chapter 3: Buy Right, Sell Right Forgetting About Sales Earnings growth is the lifeblood of almost all major stock advances. Without increasing profits, there is little reason for most stocks to go higher. As a result, it s important to look for sales growth to accompany that earnings growth. Companies can only grow earnings by cost-cutting so much. Eventually, to keep expanding earnings, the company must also expand sales. Looking for Bases Without a Prior Uptrend All bases should be preceded by a strong prior uptrend of 30% or more. This uptrend should be accompanied by improving relative strength and a very substantial increase in volume at points along the way. This action confirms that the stock has a lot of demand behind it. The subsequent base is usually caused by general market action, which causes the stock to pause before moving higher. Not Wanting to Take a Loss Many investors will refuse to sell a stock that is down because that would mean admitting they were wrong in the first place. If you re down on a stock, you already have a loss. Holding on doesn t change that fact. We recommend cutting losses at a maximum of 7 8% below your purchase price. In many cases, your capital will serve you better allocated to another stock with a stronger likelihood to advance. If you re down on a stock, you already have a loss. Holding on doesn t change that fact. Ignoring Sell Signals Selling right is as important as buying right. It s easy to get attached to a stock that has advanced a lot from your purchase price. You might really like the company story, and the fundamentals may still look fabulous. If you ignore signs that a stock is topping, however, you may see your hard-earned gains evaporate. Remove emotion from the equation. Employ a rule-based system to help spot a topping stock. Questions? (800) reachus@marketsmith.com 67

69 Applying MarketSmith Chapter 4 Develop a Routine 68

70 Chapter 4: Develop a Routine MarketSmith is designed so that you can complete your entire research routine on one screen. You no longer need to jump between windows to conduct your research. We integrated all of our research products into a single platform to allow you to quickly find ideas, analyze those ideas, and manage them all in one place. The following section will describe the steps required to accomplish each of these three critical tasks during a research routine. We end the section with a suggested approach to developing a research routine, depending on your schedule. 69

71 Applying MarketSmith Finding Ideas Screening MarketSmith allows you to screen the O Neil Database to find stocks and funds that meet a specific set of criteria. Screening is a powerful way to find stocks that correspond with your investing style. If you are new to screening, consider starting with the MarketSmith preset screens. You can find a list of screens catered to different investing philosophies within the MarketSmith Stock Screens and MarketSmith Fund Screens folders. Once you become comfortable with screening, you can customize the screener to target specific investment ideas. Schedule a session with your product coach for greater insight into using the screener. Preset Stock and Fund Screens MarketSmith offers several preset stock and mutual fund screens that are geared toward a variety of investing styles. 70

72 Chapter 4: Develop a Routine Reports Another resource aimed to help you find ideas is the Reports folder, located in the List Manager. MarketSmith reports are generated each week from preset screens that are run automatically for you. For example, the Stocks folder includes the Weekly New High Report, which lists stocks that reached a new 52-week price high during the prior trading week. The Growth 250 (G250) Report is a premium list of stock ideas that saves you time in your research process. Designed by O Neil portfolio managers, the G250 Report is generated using 30 separate stock screens that evaluate different aspects of growth stocks on a weekly basis. Because of the advanced screening criteria in the report, the list size fluctuates, acting as an additional indicator for market direction. If the list is long, the market is likely strong and vice versa. The Growth 250 Report, in conjunction with the Pattern Recognition algorithm, will allow you to search for stocks that are currently building a base or have recently broken out of a base. The Alerts feature will also allow you to set up alerts on any stocks in the Growth 250 as they break out in real-time. (using the BATS realtime reference data). Premium Stock Reports MarketSmith preset stock reports and premium Growth 250 reports. Hint Contact your product coach for a trial of the Growth 250 add-on. Questions? (800) reachus@marketsmith.com 71

73 Applying MarketSmith Analyzing Ideas MarketSmith Charts MarketSmith charts enable you to conduct a thorough analysis of a stock in a short amount of time. It is generally best to start with the weekly chart, because it gives you the most fundamental and technical data in a single snapshot, everything you need to make an informed decision. Once you become comfortable with all of the data points, you will be able to quickly scan through hundreds of charts, allowing you to stay on top of the market and your portfolio. Interpreting the Weekly Chart At MarketSmith we encourage the use of weekly charts to make decisions. We recommend that you start with the price action and interpreting the chart pattern and buy point. We work our way around the chart clockwise, as shown below, looking for certain technical and fundamental data points. Interpreting the Weekly Chart Clockwise from right: 1. Identify the pattern and potential pivot, RS Rating, and RS Line 2. Quarterly EPS and Sales with emphasis on two most recent quarters 3. ROE at least 17%? Other stocks in group? Fund sponsorship increasing? 4. O Neil proprietary rankings 3-5 year growth rate at least 25% 72

74 Chapter 4: Develop a Routine Managing Ideas This section covers techniques for watch-list management, including adding items to lists, removing items from lists, and customizing lists. Watch lists will help you focus your time and energy and track the progression of your ideas. No matter your investing style, having an organized watch list is crucial to staying organized and on top of the current market. We recommend three watch lists: Universal, Ready-to-Go, and Portfolio. Watch lists will help you focus your time and energy and track the progression of your ideas. Universal The Universal watch list is designed to capture all the ideas you may find attractive. These ideas may be weeks away from breaking out, but you want to be sure they don t fall off your radar. Fundamental screens work best to find great stocks to put on your Universal watch list. Review it weekly to maintain a good selection of stocks to watch. Ready-to-Go When stocks are completing chart patterns and nearing buy points, move these ideas from your Universal list into your Ready-To-Go list, which basically queues up stocks you may enter in the near future. This list will be much smaller and more focused than the Universal list and should be reviewed daily. Portfolio The third list tracks your Portfolio holdings. This list should be reviewed daily to evaluate the performance of stocks you own. Questions? (800) reachus@marketsmith.com 73

75 Applying MarketSmith Routine Structuring a consistent routine in MarketSmith helps you stay on top of your portfolio and potential leading stocks, without having to monitor the market every day. A routine enables you to keep up with the market and your positions in a manageable amount of time. For most investors, managing their portfolio is not their full-time job, so structuring a consistent routine in MarketSmith helps you stay on top of your portfolio and potential leading stocks, without having to monitor the market every day. Why is a routine important? With a consistent routine, you will reach better results. For example, doing research and creating a gameplan over the weekend not only minimizes the work required during the week, but also allows you to think clearly and objectively, without any emotional reactions to market action. During the weekdays, monitor your gameplan, taking advantage of the preparation you put in over the weekend. By not drifting too far from the market, you will always be able to stay in touch and develop an awareness of the signals that indicate a shift in market trend. A successful research routine will include: Generating stock investment ideas Analyzing those stock ideas Building watch lists to stay organized 74

76 Chapter 4: Develop a Routine Weekend Routine Checklist 33Review Reports folder (e.g., Growth 250, New High report) 33Run your favorite weekend screens 33Add, subtract, or shift stocks, as needed, from your Universal watch list 33Build your Ready-to-Go list for the upcoming week 33Interpret general market indices for signs of strength or weakness 33Review top 40 industry groups, plus any groups that are moving up quickly in rank Weekday Routine Checklist 33Update and review your Ready-to-Go list for any changes 3 3 Run any of your weekday screens (e.g., Stocks Up on Volume) 33Add or subtract from your Portfolio list, based on weekly market action as needed 33Print out daily/weekly charts of any new purchases/sales A Sustainable Research Routine for the Busy Life For this webinar and others, please visit: marketsmith.com/learn/webinars.aspx Questions? (800) reachus@marketsmith.com 75

77 Applying MarketSmith Chapter 5 Evaluate Sponsorship & Industry Groups 76

78 Chapter 5: Evaluate Sponsorship & Industry Groups Institutional Sponsorship and Industry Groups are two more important parts of the stock analysis process. Institutional buying and selling is what precipitates stock activity, and institutions are always looking for the fastest-growing industries. By analyzing which funds are buying a stock and what industry groups are in favor with Wall Street, you will be able to narrow your stock selections even further, improving your odds for success in the stock market. 77

79 Applying MarketSmith Sponsorship MarketSmith also offers access to an extensive mutual fund database of nearly 9,000 funds. You can screen this database for fund performance, access specific holdings within funds (as of the most recent quarterly report), and use the database to determine institutional sponsorship. Gauging institutional sponsorship is a key step in our analysis of individual stocks. As discussed previously, it takes big demand to move a stock s price higher, and that demand comes from institutional investors like mutual funds and hedge funds. Not only are we looking for an increasing number of funds owning our stock of interest, we also want to verify that some of the bestperforming fund managers own it. Start by developing a list of your top mutual funds and flag each of them in the list panel. You can hand-pick funds with impressive performance or use the components of the IBD Mutual Fund Index (MarketSmith symbol 0MUTI), which is a curated list of the best growth funds according to MarketSmith founder William J. O Neil. Once flagged, the flag icon will appear anytime these funds are in a list, or being charted. This makes it easy to see how many of your top funds have a position in a stock you are researching. Sponsorship View a list of fund owners for a particular stock in MarketSmith. Sponsorship list for KORS June 9,

80 Chapter 5: Evaluate Sponsorship & Industry Groups For example, in evaluating Michael Kors (KORS) on the previous page, there are 136 funds that have a position in KORS as of that time. By clicking on the Show Fund Ownership button in the Related Information Panel, you can see the names of all 136 funds. If you sort this list by the flag column, any of the top funds you flagged will rise to the top of the list. In this example, there are six funds previously identified as top funds that have a position in KORS. This should give you added conviction that you are on the right track. The percent of shares held and the percent of fund assets gives you a basic idea of whether a fund is accumulating a new position. For example, if a large mutual fund has a position in KORS at 0.03% of all assets, that is not a significant position. Even a tenfold increase in KORS s price would not affect the fund s performance. Watching to see if the KORS position increases as a percent of the fund s assets is a good way to confirm institutional accumulation, which would be an important factor in KORS s potential price appreciation. Using Institutional Ownership in Stock Selection For this webinar and others, please visit: marketsmith.com/learn/webinars.aspx Questions? (800) reachus@marketsmith.com 79

81 Applying MarketSmith Industry Groups Knowing how to spot industry group trends and knowing which specific groups are leading the cycle is vital to your stock selection. In every bull market, certain areas of the economy experience tremendous growth, and as a result, attract a lot of attention from Wall Street. Keep in mind, the industry that leads in one bull market will often be different from the one leading the next bull market. Studies have shown that roughly one-third of a stock s move can be related to its industry group. Studies have shown that roughly one-third of a stock s move can be related to its industry group. It is critical to identify which industries have the most potential to benefit in the next bull market. MarketSmith allows you to track these trends very easily. For example, let s analyze the Restaurants group starting in March of 2010 using the Change Date feature. While most stocks in a strong industry group will perform well, the leading stock will vastly outperform the others. See Chipotle s (CMG) move within the Retail-Restaurants Group during the above-mentioned time frame. Industry group analysis Use industry group charts to find groups that are outperforming the market. Retail-Restaurants Group vs Chipotle, March through December 2010 Retail-Restaurants Group (G5812) Chipotle (CMG) 80