RE: [CANSLIM] How do you CANSLIM?

From: "Katherine Malm" <kmalm@earthlink.net>
Subject: RE: [CANSLIM] How do you CANSLIM?
Date: Mon, 16 Jun 2003 08:07:54 -0500
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Hi Treb,

In my early days using DGO, this is exactly the same process I would use to
find candidates. The real trick is to be sure that you're not setting your
filters too restrictively so that you are missing good quality candidates.
The downside to setting your filters with a wider net is that you get far
more charts to review. In the end, it took supplemental technical tools to
find setups in the right time period, then I would use DGO to make a
fundamental assessment of the stock.

Here are some general subtleties with the DGO/IBD proprietary rankings that
are important to keep in mind:

- -EPS, RS, SMR, GRS and the Composite are ranking mechanisms. This means that
there is a forced ordering of stocks one vs. another. At the extremes, if
all stocks are lousy, some are still going to get high rankings and vice
versa.

- -SMR is a combination of 5 proprietary rankings. It's a ranking of a
ranking, so is even more suspect. More weight is placed on EPS and RS, but
no info is given as to exactly how this measure is derived. Caveat emptor.

- -EPS considers earnings over the last 3 years and in more recent quarters.
This lags badly when a stock has not been consistently performing over that
entire period. So, if it is a turnaround or there has been a substantial
change in the business plan that creates a backdrop for far better earnings
in more recent periods, the EPS will look lousy, even though the company is
a good quality candidate. Conversely, since fundamental reporting lags, it's
very easy to select a high EPS stock that is more recently beginning a slide
in their earnings pattern.

- -RS is an extremely "chunky" measurement. It looks at the changes in price
over the last quarter, 2 quarters ago to now, 3 quarters ago to now, 1 year
to now. That use of a precise moment in time will sometimes play havoc with
the measurement and as a result RS can bounce around from high to low in a
heartbeat.

- -It is also not uncommon for a stock to have a very low RS at the time it is
setting up. That RS will rise quickly when the stock stages a breakout and
moves successfully onward and upward, but if you wait until the RS is very
high, it's easy to miss the up and comers. There are *many* subtleties to
RS, this being only one. But also consider that the nature of the market
will also impact which stocks receive lower RS's. For example, If many
stocks are breaking out and moving up, a stock that is finishing off a very
nicely formed and lengthy base will often have a very low RS. That has
nothing to do with its attractiveness or technical health, its just that
it's currently basing (perhaps even absorbing a prior move) while other
stocks are moving. I took a tour through this week's IBD100 and found that
there were only a handful of stocks even close to a setup point. Why's that?
They've got a high RS because they *have* been moving up, not because
they're getting *ready* to move up. Take a strong market and pick the 100
top stocks and guess what? It's a done deal. Nice to know what's working if
you're willing to wait for a pullback, but mining off a list like this means
one never sees them *as* they were starting their move and never will.

- -Here's one last amusing example to show you the vagaries of a ranking
system like RS. Take a look at the chart for KMRT. It recently reorganized
and emerged from bankruptcy. When it began trading under the reorg, the old
stock, worth about 0.10 per share, was restructured so that it now trades at
about $15. The RS today? 99! That's entirely as a result of the methodology
used for the RS calculations, but I wouldn't exactly call that "a strong
stock."

- -A/D is a lagging indicator that looks at the previous 13 weeks of
accumulation/distribution by "the big players." It's somewhat useful in
reading the *trend* of the market as a whole (e.g., watching the trend of
total ABC's over time) or for an individual stock, but be careful setting
this one too tightly, as more recent accumulation by the institutional
players will not be reflected in the measurement until well after the move
is underway.

- -GRS is based on the average price of all stocks in the industry. Approx 70%
of the rank is based on more recent price action, 30% on older price action.
The industry ranks are then based on rank ordering each industry by their
GRS. Leading stocks will *lead* the industry price action and their
favorable price action will not show up in the overall industry rankings
unless other stocks follow suit. WON suggests that you restrict most of your
buying to top industries, but also says that it is more important to look
for a strong stock and then verify that there is at least one other strong
stock in the same industry as a double check on the action. A filter that
forces selection only from stocks in certain industries will miss the boat
on some of the best stocks out there.

Katherine


- -----Original Message-----
From: owner-canslim@lists.xmission.com
[mailto:owner-canslim@lists.xmission.com]On Behalf Of Treb Courie
Sent: Sunday, June 15, 2003 6:19 AM
To: canslim@lists.xmission.com
Subject: [CANSLIM] How do you CANSLIM?


CANSLIMmers,

There are many discussions on this list about the CANSLIM characteristics of
particular stocks, but not nearly as many about what I consider teh harder
part of CANSLIMming--how to pick out those stocks out of the thousands of
stocks out there.  Some people here have said that they use "Where the Big
Money is Flowing" or other IBD-sorted lists--and others have mentioned some
problems with using those lists (if the big money is flowing there, it's
already too late).

For discussion, here is how I do it.  I am still refining this method and
know that it has some limitations.

- -Every weekend I go to DGO and download the Daily Graphs Company Index (I'm
pretty new to DGO and not familiar with all the powerful features on it.)

- -I put it into an Excel Spreadsheet and Filter the Data, usually >75 EPS,
>75 RS, SMR B or better, A/C B or better, >70 Comp, >50 Group RS.

- -I then go through all of those stocks (this week about 140 stocks) and view
the weekly graph, looking for a basic chart pattern.  For those with a
pattern, I check the daily (esp. if it has a short handle) to look more
closely at the recent activity.

- -Any stocks that I feel comfortable with I will record the pivot point and
watch that stock all week for a breakout.  This week I am only watching four
stocks.

- -The following week, I will repeat the entire process.

This process has some downsides.  One is that it takes a long time to view
that many charts, but I haven't figured out a good way to keep notes on the
stocks weekly while downloading the new ratings into my spreadsheet.
Another is that too many of the stocks that I view have already broken
out--I need to change my criteria to spot them before breaking out without
increasing my chart-analysis workload.

I'd love to hear how others select their stocks and any comments others may
have about my system.  For example, for those of you who use the IBD
ratings, what do you use as your minimums?

Treb

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