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The market constantly reinvents itself. Today’s leaders could be tomorrow’s laggards. In this section, we’ll discuss ways to use MarketSmith to guide your search for potential investments.
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Create a Stock Watch List
If you haven’t done so already, create yourself a Watch List of stocks you’d like to keep on your radar. Use this to keep track of your ideas. You’ll want to constantly cull this list so you have a ready reserve of potential investments. Here are a few tips to keep in mind:
- Keep your Watch List fresh. If a stock no longer meets your investing criteria, go ahead and delete it from the list. The goal is to have a list of stocks that are close to buy points. Try to go through the entire list weekly at the very least.
- Don’t go overboard with the number of stocks. You want to have a list of the best buy candidates. Limit the list to the number of ideas you feel comfortable managing. You might even consider an absolute limit, and force yourself to remove a stock in order to add another one.
- Don’t view the list sorted alphabetically. If you are viewing the list on an intraday basis, try sorting by Volume % Change. This will highlight those stocks experiencing exceptional volume. Alternatively, you could sort the stocks by an item like Composite Rating™, so the highest rated stocks are at the top.
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Screens Can Find Strong Stocks
There are nearly 8,000 domestically traded stocks in the O'Neil Database®. Chances are you don’t have time to research every one. That is where the MarketSmith Screener comes in. No matter your investing style, there are most likely characteristics you look for in a stock before considering investment. For example, if you use the CAN SLIM investment system developed by our founder William J. O'Neil, you focus your research on stocks with outstanding earnings growth and strong technicals. If you’re a value investor, you might emphasize stocks that have low price-to-book or price-to-earnings ratios. The custom Screener will focus your search on stocks that are in your investing sweet spot.
There are a number of different ways to use screens. You’ll have to find what method works best for you. In many cases, you’ll want to use a variety of screens depending on your goal.
Wide Net Screen
Let’s start with a simple screen that we’ll call the “wide net” screen. In this style of screening, your goal is to cull the nearly 8,000 stocks in the O’Neil database down to a reasonable number, but not filter out too many stocks that could make investment candidates.
If you use the CAN SLIM investment system, you spend your time looking at stocks that already have outstanding earnings growth. A simple way to home in on those stocks is through the EPS Rating . Let’s search for stocks with EPS ratings of 70 to 99.
The Screener dynamically updates with results as we enter criteria. In the Waterfall Summary in the upper left of the Screener, you can see how many stocks are left.
Let’s enter another parameter to narrow down our search. CAN SLIM investment system followers will want to focus on stocks that are already performing well on a return basis. Thus, let’s also search for stocks with Relative Strength Ratings from 70 to 99. Now our universe is reduced further. Let’s add a few more parameters:
- % Change in Latest Quarter’s EPS vs. Same Quarter Prior Year > 25%
- Current Price > $10
- Current Price in Relation to 52-Week High: Greater than -15%
At the time of this write-up, that produced 242 companies, which is a manageable number for a wide net screen. A good range for this type of screen might be 200 to 300 stocks, but ultimately it depends on the time you want to spend. Depending on your preferences, you could continue to add more parameters or loosen the existing criteria.
Now, let’s sort these stocks by Industry Group Rank ascending and Relative Strength Rating descending so that we have a logical order to view them.
Double-click on the first symbol and bring up a weekly chart of the stock with the fundamental information displayed. Using the space bar or play button, you can cycle through these charts relatively quickly, only pausing at stocks that seem to be setting up proper bases. When you find a stock that interests you, you can add it to your watch list.
Are every one of these stocks going to be worthy of more research? Definitely not. Some will be extended past proper buy points. Some will still have more work to do building proper bases. Others will have a different flaw. However, by looking at a large number of charts, you’ll get a feel for what stocks are leading the market. If a particular stock catches your attention, your screen will likely include other stocks in the same industry group so you can view the group move in context. You will also miss fewer stocks that a tighter screen might have left out.
Of course a wide net screen will take more time to look through, so it’s probably not something you’ll have time to run every day. Consider running a screen like this once a week, so you can get the “big picture” of how leading names in the market are doing and update your watch list.
Volume Screen for Refining your Stock Search
In contrast to a wide net screen, there are occasions when you might want your screen to return only a handful of stocks. For example, perhaps you want to set up a screen to find stocks that are experiencing exceptional volume that day. If you follow the CAN SLIM investment system, you only want to see high volume stocks that have strong earnings growth and high relative strengths.
Here’s a sample screen you might run:
- EPS Rating 75 to 99
- RS Rating 75 to 99
- Current Price > $10
- % Increase in Current Day’s Volume vs. 50-Day Average Volume > 50%
- Current Price in Relation to 52-week High > -15%
On the day of this write-up, that screen resulted in 31 names. Basically, we’ve created a list of stocks that are experiencing 50% higher volume than normal for the day, but indicated we only see want to see those that also have strong earnings growth and relative strengths, above $10 in price.
This list gives us a pretty good idea of what leading stocks are driving the market that day. We might run this on a daily basis and monitor these stocks as potential buy candidates. We would also want to note whether certain names appear on this list on multiple days because these are stocks that are showing a lot of strength and would be good candidates for your Watch List.
Other Screening Techniques
These are just a couple of ideas on how to use screens effectively. Other ideas include setting up a screen based largely on technical factors and then scanning the data boxes on the charts for what the fundamentals look like. Or you might reverse that, and set up a screen based purely on fundamental factors, and then scan the charts for what stocks are setting up technically. Take some time to experiment to see what style works best for you.
In addition to screens that you create, MarketSmith provides several different benchmarks screens based on the investing literature of famous investors. These benchmark screens include a William J. O’Neil CAN SLIM screen, a Peter Lynch growth at a reasonable price screen, a Benjamin Graham value screen, a Warren Buffett value screen, a Martin Zweig growth screen and a James O’Shaughnessy small cap, growth and value screen. If you favor stocks similar to these investors, these screens can help spark new ideas. Beyond that, by taking a look at the criteria, you can gather ideas on what kind of screens you would like to build.
The MarketSmith Community offers another way to develop screening ideas. You can browse other users’ shared screens and share your own. The community can rate and comment on screens, so you can get a sense of what shared screens other users have found most useful. Take some time to explore screens shared by fellow users. This is a helpful way to learn new approaches to screening.
To search for shared screens, click on Browse in the Community module in the Screener panel. You can save a copy of these screens, so you can fine tune them to your preferences. You can also share and view screens with just specific users and group. Learn more about sharing screens.
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Reports for Investing Ideas
Think of reports as a type of pre-set screen. MarketSmith includes over 65 reports. Each one is set up to help spur your search for new stock ideas. You can review a summary of the selection criteria for each report.
Let’s take a look at how you might incorporate a couple of the reports available in MarketSmith as part of your idea generating routine.
Weekly Report of Stocks Approaching or at New Highs
This report highlights companies that meet the following criteria:
- Traded within 5% of their 52-week price high on any day during the prior week
- Have EPS and Relative Strength Ratings of 80 or above
- Have Accumulation/Distribution Letter Grade ratings of C or better
In short, this is a list of stocks making new highs or coming close to it that also have our strong exclusive proprietary ratings. In the List Manager of MarketSmith, under Reports: MarketSmith Reports, click on Weekly Report of Stocks Approaching or at New Highs. Double-click the first symbol in the list to bring up the chart. Use the space bar or Play button to scroll through this list, pausing for charts that require further investigation. When you find something you like, add it to your Watch List.
The universe for this list is selected once per week after Friday’s close. There are a couple of reasons to check this report regularly.
- In a bull market, you will often find that stocks at new highs go even higher. These are often your true leaders, so this list is another great source for investment ideas.
- To help your overall market analysis. Pay attention to what industry groups the stocks in the new highs list are coming from. Are they defensive areas like Consumer Staples and Utilities? Have stocks from a new group started dominating this list, signifying a possible change in market leadership? In short, checking this list often will help key you into what types of stocks are leading the market so you can put the current market environment in context.
IBD Index Reports
If you are a subscriber to IBD eTables, you can access the four IBD Index Reports available in the newspaper or on Investors.com directly in MarketSmith. These lists include the IBD 50 Top Rated Stocks, IBD New America Index, IBD 85-85 Index, and IBD Big Cap 20. You will have MarketSmith’s one-stop display of extensive fundamental and technical data to examine the stocks in these lists more efficiently.
Let’s use the IBD 50 Top Rated Stocks as an example. In the List Manager of MarketSmith, under Reports: Stocks, click on IBD 50 Top Rated Stocks to display this list. The IBD 50 Top Rated Stocks list is a computer-generated ranking of leading companies trading in the U.S. based on the quantitative factors of the CAN SLIM investment system. In short, a good list to refer to look for investment ideas.
Double-click the first symbol in the list to bring up the chart. Again, you can use the space bar or Play button to scroll through this list, pausing for charts that require further investigation. When you find something you like, add it to your Watch List. The IBD 50 Top Rated Stocks list is available in MarketSmith every Friday night. If you have some time over the weekend, this is a helpful list to look at before Monday’s open.
In addition to an idea generating function, the IBD 50 Top Rated Stocks list can be used as an indicator of how leading stocks are behaving. For example, is the market up but leading stocks, like those in the IBD 50 Top Rated Stocks list, not advancing much? That could be the sign of a weak rally. Take some time to explore the many useful reports in MarketSmith. These are idea sources you can incorporate into your investing routine.
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Leading Industry Groups and Leading Stocks
A more top-down approach to idea generation is to use Industry Groups. Focus first on identifying what sectors and industry groups are leading the market, and then move on to finding the best stocks within those areas. The importance of staying on top of industry group movements cannot be overestimated. Of the most successful stocks from 1953 through 1993, two of three were part of group moves. Studies show that 37% of a stock’s price movement is tied to the performance of its industry group. Another 12% is due to strength in its overall sector.
When analyzing sector or group moves, remember that the economy constantly reinvents itself. The groups that led a previous stock market cycle will likely not be the next upturn’s winners. And within each cycle, there will be some shift in industry group strength as the cycle ages and leadership rotates from “early-cycle” to “late-cycle” industries. If you keep your focus on the groups and stocks that led a previous market cycle, you could very well miss the next market leaders.
The 197 O’Neil Industry Groups
In addition to sectors, William O’Neil + Company classifies every stock into 1 of 197 industry groups. Other investment services are less specific, making it difficult to determine where the true leadership is coming from. The 197 O’Neil Industry Groups help you pinpoint the specific areas driving the market.
- Each day, check the Industry Performance List sorted by intraday percentage change. Do commodity groups like Oil Services and Fertilizers continuously appear at the top? Or are you seeing more medical and biotech groups?
- Scan the Industry Groups New Highs list, which shows you stocks making new highs sorted by industry group.
- Focus on groups with the most stocks making new highs. By making these lists a part of your routine, you’ll get a feel for what groups are driving the market.
Beyond the intraday lists, take a look at the MarketSmith report of The 197 O’Neil Industry Groups sorted by current group rank.
- Growth investors should concentrate their research on the top 40 or 50 industry groups. This is usually where the best stocks come from. Groups are rated on six-month price performance, a period long enough to pick up on significant trends.
- Scan the Industry Groups list to look for groups moving up from lower rankings. This is a great way to look for potential changes in market leadership.
- Don’t completely ignore lower-ranked groups. Occasionally a weak overall industry group will have an innovative subsector that isn’t yet large enough for its own industry group. Leaders sometimes come from lower-rated groups.
Industry Group Charts
Another way to spot group strength is by using MarketSmith’s Industry Group charts to get a visual perspective of a group’s move. Has the industry group performance been relatively flat, but is now showing strength that could lead to potential investment ideas? Or has the group been on multi-year move straight up, which would make you more vigilant for topping characteristics?
Once you have a feel for the groups driving the market, you’ll want to drill down to find the best stocks in those groups. Those following the CAN SLIM investment style will want to focus on stocks showing high relative strength and outstanding earnings growth. A good way to gauge those things is to look at the stocks rated highest by Relative Strength or EPS rating within a group. Composite Rating, which combines many factors common to the best growth stocks, is also another useful metric to sort by. The best industry groups will usually have several stocks that take advantage of the positive tailwinds within that area. Whenever you find a potential investment, make sure to view the rest of the industry’s components. Look for other stocks that are confirming that stock’s move. The big institutional investors that drive the market have a lot of money to invest. Thus, they’ll often spread their investments among several stocks. This confirmation gives you confidence that you have spotted a stock and industry group with true strength.
Follow-On Effect and Cousin Stock Theory in Industry Groups
Stay on top of industry and demographic trends so you can spot areas of economic strength. A major development in one industry will often follow-on into related industries. For example, in the late 1960s airlines stocks boomed after the introduction of jet airplanes. The increase in air travel spurred a run in hotel stocks a few years later. When the price of oil grew in the late 1970s, oil companies began a drilling boom which later fueled a surge not only in oil stocks, but in oil service companies. Does that type of pattern sound familiar in the most recent commodity boom? It should.
In addition, if a company is doing really well, there often will be a supplier company, or “cousin stock,” that benefits. When you find an outstanding stock, research it thoroughly and look out for any related companies that may also rise.
Custom Screens Technique
Here’s a technique to incorporate industry group analysis into your Custom Screens and Report viewing. When running screens in MarketSmith or looking at a report, sort the list by industry group rank ascending and then by a secondary sort such as relative strength or composite rating in descending order. If you always view lists in this order, it will reinforce what industries are leading the market and what stocks are leaders in those group because they will always appear at the top.
Look for Sponsorship Support
You can also use your knowledge of better quality mutual funds as a source of new stock ideas. If you know a fund manager to have a strong track record, then the list of what he or she owns can be a good source for stocks that you may have missed in your other research. After bringing up the chart of one of these funds, click on the Holdings button in the Related Info panel to see what that fund holds. You can click on the Show All Holdings button at the bottom of the screen to view the complete list. Remember that while holdings are usually only reported quarterly, it can take funds awhile to build a full position, so pay special attention to new positions or ones that have increased in recent periods.
How do you get to know who the better fund managers are?
- Take a look at the O’Neil Overall and In Category mutual fund ratings available in MarketSmith. The ratings are based on 36-month price performance and will give you an idea of which funds have outperformed their peers.
- Subscribers to IBD eTables cans review the IBD Mutual Fund Index components available in MarketSmith. These funds were selected by William J. O’Neil and the editors of IBD and are good ones to become familiar with. To access this list, bring up a chart of the IBD Mutual Fund Index by entering symbol 0MUTI (the first character in this symbol is a zero). Then click on the Components button in the Related Information panel to view the list of mutual funds that make up the index.
- Use the MarketSmith Screener to search for better performing mutual funds to help build a watch list of quality mutual funds.
If you make a point to always look at the mutual fund holders of stocks you’re considering, you’ll start to develop a list of which funds keep popping-up as owners of market-leading stocks. You can get to know these funds better using the mutual fund features available in MarketSmith, mutual fund articles in IBD, and by taking the time to look up the prospectus of certain funds to get an idea of how they invest.
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Common Investment Research 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 breakout 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.
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 what industries 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 re-invent self. Don’t just focus on the old leaders. Keep an open mind to who the new innovative companies are.
Too Many/Too Few Screening Criteria
Screens are a powerful idea generating tool for investing. MarketSmith provides access to over 140 screening criteria. Those new to screening have a tendency to want to enter something for every one of these items. That’s not necessary. A useful screen can be built with just a few criteria. Try entering one criteria item at a time and watching how many stocks remain in the Waterfall Summary in the custom screener. Then proceed to add another parameter. Once you get down to reasonable number, stop and take a look at the stocks you found.
At the same time, some new users have a tendency to enter too few screening criteria or criteria that is too broad. The result is you waste time looking at stocks that you would never consider investing in. The idea is to focus your screening on stocks that are well matched to your investing style. Again, try entering your parameters one at a time and pay close attention to the Waterfall Summary in the custom screener, which visually cues you into the number of stocks that match your filter.
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