CANSLIM.net News
"A Vital Source for the CANSLIM Investor" 

Volume 6, Issue 5 - $7.95 
Thursday, May 1st, 2003

Home | Stock Screening Tool | Stock Alert Reports | Member Login | Help!

May 2003 Issue's Featured Articles:
Stocks to Watch in This New Market	Market’s Leading Groups
Investing For the New Millennium   by Kenneth J. Gruneisen	Letter From the Editor by James Taulman, Managing Editor
Interesting Market by Gary Kaltbaum	CANSLIM Like Mutual Funds by Soraya Nasrallah

Market Meets O’Neil’s Definition of “Healthy” for First Time in Years
by Kenneth J. Gruneisen, Registered Investment Advisor, Source Capital Group, Inc. Members NASD/SIPC

The major indices are facing some important challenges in the near term.  With all due respect to its impressive 17.2% rise from its March 12^th low, let’s take a look at the bellwether S&P 500 Index for starters.  You don’t have to be an expert chart reader to see this.

The S&P 500 Index’s January ’03 peak at 935, December ’02 peak at 954, August ’02 peak at 964 are all potential resistance barriers (see green lines) that will probably take a fair amount of time to test and/or exceed.  It may not seem like much more to ask for, but a rally 4.3% above its April 29^th high of 924 would technically break the S&P above all of those key points and out of what many are categorizing as a “sideways” market confined to a limited trading range.  We have included a 2-year chart so that you can see the significance of the September ’01 low at 944 for the S&P 500 (see orange line).  Notice how the strength has been short-lived in every instance where there has been a rally above that September low, which is trying to act as a resistance point now.

Sometimes, however, simply going sideways is enough to be an improvement by at least some technical means.  And April’s continuous rally actually helped the S&P break above an intermediate-term downward trend line (see pink line).  However, you’ll see on the following 4-year chart that the S&P 500 has yet to convincingly break above its long-term downward trend line.  At the time I am writing, it appears to be facing that important challenge.   

Meanwhile, the Nasdaq Composite is well above its September ’01 low (1,387), and it has already topped its January ’03 peak.  It is now closing in on its December ’02 high of 1,521.  There doesn’t appear to be much technical chart resistance for the COMP all the way up to 1,700 once it manages to break out of the present “sideways trading range”.

 A key reason that right now it is important to study the major indices and recognize the challenges they are presently facing is because the overall market environment is going to dictate how well you are able to do with your individual stock selections.  The chart resistance gives the market some reasons to stall and possibly weaken in the short-term.  We are not calling for a retest of the March lows by any means.  And in the event we see bullish breaks above the resistance point outlined above, the momentum behind the rally could intensify even more so in the weeks ahead. 

 At least one other point is worth noting in the charts of all of the major indices.  Their 200-day moving average lines have flattened out and been turning upward.  Did you notice that?  I have heard Mr. O’Neil mention on many occasions that a “healthy market” features at least three major indices trading above their rising 200-day lines.  Well folks, based on that definition, for the first time in years the market looks like it is healthy!

 Another crucial element in the mix is the steady supply of breakouts and strong leadership in the market.  I’m not talking about gold stocks, REITs, defensive or cyclical leadership.  I’m talking about leadership from growth companies including technology, internet, telecom, medical, and retail issues.  Going right along hand-in-hand with this healthier acting market are an increasing number of high-ranked companies, many with impressive earnings histories to back up their strong looking charts. 

Market’s Leading Groups
We have been seeing stronger leadership and buying conviction in this market, and at this time the following areas are providing some of the most promising action.  For those who are on the lookout for the early leaders, it is important to see confirmation in the group of stocks from which you are making your selections.  Strength from several similar companies can be a very important indication, and watching for this can be very helpful to your successful stock selection.

Leadership is Important to Your Success – Options Are Not
by Kenneth J. Gruneisen, Registered Investment Advisor, Source Capital Group, Inc. Members NASD/SIPC

During this past month I was invited to make seminar presentations to four investor groups.  Of course, the talk I gave at each of them was very heavy on the details of how I go about applying O’Neil’s CANSLIM method in making the stock selections that I recommend to clients.    

I always enjoy hearing feedback from the people that I meet at these speaking events.  It can be very interesting to hear someone explain back something they’ve just heard.  Some of these recent cases have allowed me to understand different viewpoints that let me also put some of the important concepts in another person’s words. 

 I was very pleased to hear one of the attendees say, “From what you’ve just shown us, it seems that you’re starting with a ‘watch list’ of high-ranked stocks that have strong fundamentals, and then using technical analysis to determine your buy and sell points.”  Yes, Sir!  It sounds like you have been sitting in the front row and listening well!  

"Chasing a Stock That is too Extended will Obviously 
Increase the Chances That You Might Later be Stopped 
out of the Stock with a Loss."

 One of the things that people find most shocking is the part of my presentation where I show charts of specific stocks and charts of their corresponding sector indexes.  This is when I am talking about the L in CANSLIM, which reminds us to choose a leading stock from within a group of stocks that is presently providing market leadership.  For examples, I show 5-year chart of a semiconductor stock such as Applied Materials (AMAT), and then we study the similarities in the chart of the Semiconductor Index (SOX) for the same 5-year period.  Then we do the same for the S&P Retail Index (RLX) and retailers like Wal-Mart (WMT) or Home Depot (HD) over a 5-year period.  And we compare an Oil Services stock like Schlumberger Ltd (SLB) and compare its 5-year chart to the Oil Services Index (OSX).  Then we study a chart for Yahoo!(YHOO) and see how it is strikingly similar to the what the Internet Index (DOT) has done over the past 5-years. 

 By the time we get through the “L” portion it becomes very clear to the audience how important industry group selection is to your success.  Investor’s Business Daily always says on page B4 above the 197 Industry Group Rankings that “group action determines at least half of a stock’s performance.”

 I have said before that success with this method this isn’t about guessing what might happen, but about reacting properly to what actually is happening.  When we see a high-ranked stock break to new highs from a base pattern at least six weeks in duration on higher than normal trading volume, we look at that action as a “buy signal” in the stock.  And when we are holding a profitable position, we don’t just arbitrarily sell it, especially when the broad market is in a confirmed rally.  We give winners the benefit of the doubt, and only sell them whenever we see a “sell signal”.  A stock is probably giving you a sell signal if it trades higher than average volume as it breaks below a prior support level, violates an upward trend line, or slices under its 50-day moving average.

 With the recent rise in the market, many stocks are now getting too far extended from a reasonable buy point.  It is best to make your purchase no more than 5% above the "pivot point" which is normally figured at .10 above the prior high.  Chasing a stock that is too extended will obviously increase the chances that you might later be stopped out of the stock with a loss.  You need to be ready to either buy very quickly when a stock is breaking out, or else be willing to pass on those ideas that get away from you and wait for the next one. 

What Are My Options?

Frequently I hear questions at my seminars about options trading.  Why do people take such risks?  Usually they are trying to hit a “grand-slam home run” instead of sticking with the basics and making sure they at least hit a single.  They are taking a gamble, trying to turn a small amount like a couple of hundred (or thousand) dollars and turning it into a whole lot more. 

 Puts and calls are a tempting way for investors to get a lot of leverage, but the problem I have with them is that it is virtually impossible to manage your losses and keep them within the 7-8% maximum loss guideline O’Neil continually emphasizes.  You can quickly find yourself down 50-75% or more on your purchase in an options trade, and often times when you buy an option it will ultimately expire worthless.  If you’ve only got a small amount of investment capital to work with in the first place, then it is even more critical that you avoid the large percentage losses that are commonly the result of an average investor’s decision to purchase options.

 I don’t personally know anyone who has made a fortune trading options, but the subject does come up on occasion when I hear about fortunes lost.  However, I have seen fortunes made, and I have witnessed numerous small accounts turning into very large accounts by wisely trading individual stocks based on CANSLIM.  

Mutual Funds With Investment Criteria Similar to CANSLIM: A Better Way Of Selecting Funds For Your Retirement! 
Article by Soraya Nasrallah, Registered Representative, Source Capital Group, Inc. Members NASD/SIPC

Many of you know that Mutual Funds are an excellent way to invest in the market because they offer you diversification, professional management, and instant liquidity. In some ways it is like having your cake and eating it too. That does not mean that you should invest all of your investment dollars into Funds; it just means that it is wise for the majority of investors to have a certain percentage of their portfolio invested in a Fund that will cater to their needs. 
 
There are over 15,000 Funds out there, and there are actually more funds than there are stocks trading on the major exchanges. So how does one choose from such a vast array of selections? First I will mention some steps and tips you may follow in order to select a fund, and then I will offer you some Funds that I have found to be investing in a similar way that one would invest in CANSLIM stocks.

1. What is your time frame and goals? Are you able to wait an approximate minimum of 10 years before you dip into the monies in a Fund?

2. If you have time on your side and you wish to have this money grow so that it may offer you possible higher returns than with a “safe” investment (like CD’s, Money Markets etc.) then you might place yourself in the Growth, Aggressive Growth, and Growth & Income Categories. 

3. To search for Mutual Funds that fit under a particular category you can use Morningstar for your search. Feel free contact my office for help evaluating the Fund categories appropriate for you.

4. Make a list of the Funds you have found. You may also go through each of the choices Morningstar has come up for you. This list may be very large! Among the most important sections, I would recommend for any investor to look at the objectives of the Fund and how stocks are selected before it is included into their Fund.

5. Look at manager of the fund and the history of the fund (in terms of % returns). If a Fund has achieved outstanding returns, it is not because of the Fund’s name, it is because of the manager or managerial team of that particular Fund! Choosing a Fund that has been in existence for at least 3 to 5 years and has had management stability would be a better choice.

6. As we all know, these past 3 years have been rough on those investments that are usually considered to be beneficial for investors with a longer time frame. With this said, do not base a Fund choice solely on these past three years. There are a lot of Funds out there that have achieved exceptional returns for the past 5 to 10 years, but have offered small or negative returns due to the climate of the Market. After all, most “ships” or stocks go up or down with the “tide” or market.

7. By now you probably have narrowed down your selections to 10 or 20 Funds. That is still quite a bit, and you don’t need a basket of Funds to get you where you want to be. Depending on the percentage that you can allocate toward Funds, you or your Investment Advisor should find just 2 or 3 funds that will do the job. Make sure you are not duplicating your holdings with each Fund you own. If you choose two Funds to invest in, make sure the holdings within the Funds are different.

8. Sales Charges and Total Expenses. Sure, you want to get the best deal in town; but not at the expense of your retirement! You will get more out of your Fund if you invest a lump sum (like a roll over from another company or retirement account) when the market is down. Remember, when you buy shares of a Fund you pay the Public Offering Price (which includes the sales charge) and when you wish to redeem you receive the Net Asset Value (NAV). The NAV is calculated at the end of each trading day.

9. Set up an Automatic Investment Plan! You have seen me writing about this one before. I love AIP’s, which are a great way to stay invested while at the same time maintaining the peace of mind that you are PAYING YOURSELF FIRST! Rather than “when I get around to it”, people need to put themselves and their retirements FIRST! Because I have a time frame of 20+ years, I currently have most of my retirement money in cash, and a Growth oriented Mutual Fund within my Roth IRA. Because I want to participate in the “safer” side of stocks, I have also been looking for a Mutual Fund that invests primarily in dividend-paying large cap companies that will accept a monthly minimum of $50 dollars invested via an Automatic Investment Plan. I’ll let you know what I find.

10. It takes a lot of research to choose the right investment based on your goals and time frame. With the help of your Investment Adviser, you will be able to find the path that leads you to the future you have been longing for. 
 
The following are some of the Mutual Funds I have found to have an investment criteria selection process somewhat similar to CANSLIM. In general, they focus on small companies that are leaders with superb earnings and momentum. Please be aware that these are not deemed “buy recommendations” and it is important that you invest only in Funds based upon your particular needs and risk tolerance.

- A LETTER FROM THE MANAGING EDITOR -

 Spring is here and the season symbolizes a time of growth and renewal.  Let’s hope that this will continue to apply for the markets as well. We have finally had the chance to work in a market that is conducive to applying CANSLIM and we have had some great winners recently and are really enjoying what we do. 

In the March ’03 issue I wrote about investors that I had talked with at that time who were considering abandoning CANSLIM and picking up another investment method.  I reminded them that I’ve seen the biggest percentage gains, the biggest account gains, and the biggest improvements in a person’s quality of life come to those who were using CANSLIM to invest in stocks.  I advised that instead of putting a lot of time, money, and effort into something new, they might want to consider honing the skills in what they were already familiar with, and in the meantime keeping cash on the sidelines. 

Those who had the patience to wait out a bad market preserved more money to put to work in some of the stocks that have broken out in this recent rally. CANSLIM has proven itself to me once again.

This month in our “Stocks to Watch in This New Market” section, rather than trying to play “stock psychic” and guess what might break out next in a market that may be due for a healthy pullback, we have called your attention to some high-ranked ideas with strong fundamentals that appear to most definitely be in play right now, and in most cases they are not ridiculously extended.  As Mr. Gruneisen notes in his “Investing for the New Millennium” article (page 3), with the recent rise in the market, many stocks are now getting too far extended from a reasonable buy point.

Ken’s article also points out again that success with CANSLIM isn’t about guessing what might happen, but about reacting properly to what is actually is happening.  When we see a high-ranked stock break to new highs from a base pattern at least six weeks in duration on higher than normal trading volume, we look at that action as a “buy signal” in the stock.  If you find a stock that has all of the CANSLIM characteristics but it is getting a little too extended, consider taking a position on a pull back or a dip considered as normal consolidation.  Note that at this point the major indices are facing what may be tough resistance levels near previous intermediate-term highs, so upon any broad market weakness it is critical for you to pay attention to the stocks which hold up near their highs, and be quick in avoiding those which fail. 

Also, keep in mind that while some of the stocks featured appear to have broken out of short-term patterns, when you study their longer-term charts you will find that there are also some breakouts (or near breakouts for those who want “set ups”) of more significant long-term bases coming into play in many of these cases.  It will help you to put the recent action in proper context if you take the time to pull up 3-year charts on many of the stocks featured, especially RESP, IDXX, MAXF, COLM, FDCC, and MME.

Some of you have written in suggesting that we provide a list of “set-ups” that are near a breakout.  In the past we’ve been able to do more of that, mainly because lots of stocks were setting up and very few were breaking out.  Think about this!  Now that the market has been running for several weeks and there has been some establishment of leadership in certain industry groups and specific issues, is it not fair to say that a stock that is only setting up for a possible breakout right now could be considered a laggard?

For the record, ideas featured in previous CANSLIM.net News issues had in many cases passed their pivot points, so it is true that some folks thought we were “late” in mentioning them.  In early March we received one phone call from a new subscriber who complained at the time that 9 out of the 10 stocks just featured in the March issue were down.  Never mind that the market was also in a nosedive at that time.  Four of those ten ideas have since traded up greater than 40% from their price when the March issue was published.  Point being, the market will dictate what happens!

In a final note I would like to thank all of our subscribers, from our loyal long-term customers to the folks that have recently decided to sign up and give CANSLIM.net News a try.  No matter how large our reader list grows I want to emphasize that every customer is important to us and we will continue to provide a high level of customer service to everyone.

Your comments are always welcome and appreciated. 

Best regards,

James Taulman
Managing Editor
CANSLIM.net News
1-800-965-8307