Potential Alternative CANSLIM Indicators

AFTA‐DFW At Baylor Dental CollegeMarch 20, 2013

Jim Gunnjimgunn@jgunnresearch.com

Etal,James Pujals

pujalsj756@verizon.net

Disclaimer

No Representations are made that the investment strategies presented herein or discussed by the presenter are complete, without error, or will produce desired investment results. This presentation is made for information sharing purposes only. Nor are any representations made that the investment strategies discussed have been employed to achieve successful investment results. Many of the results are based on back testing with historical data and simulated investing. Future investing results may significantly differ. You should perform your own independent research and “Due Diligence” prior to making any investment decisions, and invest accordingly.

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Presentation Topics

• Overview of the CANSLIM methodology and indicators• Potential Alternative CANSLIM indicators• Focus: Alternative Relative Strength (RS) indicator(s),

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Investors Business Daily(IBD), Investor’s Corner Article, 3/22/2013“Some Stocks May Have A Flaw, Yet Still Produce Terrific Runs”

Extracts:“The more characteristics of high quality a stock has, the better its chance of being a market winner.” Of course, the more you demand from a stock, the fewer that maybe suitable for purchase. We recently ran a screen of stocks that match IBD’s 20 Rules For Your Investment Success. The results were more than limited: Not one stock met the grade.”

“That doesn’t mean you should forget about stock investing and seek returns elsewhere. The truth is, stocks can fall short in one or two areas but still become successful investments. They must be purchased and sold properly and when the market is strong. The key point: It’s the degree of drawbacks that come up in a stock’s analysis that has to be weighed. While there may be no such thing as a perfect stock, investors are always better off going with the stocks with the fewest blemishes.”

“As the research process goes deeper, more imperfections come up. Ultimately, an investor must decide which flaws are acceptable.”

“Don’t expect a computer screen to make all those decisions for you. Critical thinking, knowledge and experience are key.”

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CANSLIM Overview*

• C – Current Big or Accelerating Quarterly Earning and Sales per Share

• A – Annual Earnings Increases: Look for Big Growth• N – New Companies, New Products, New Management, New Highs Off Properly Formed Bases

• S – Supply and Demand: Big Volume Demand at Key Points.

• L – Leader or Laggard: Which is Your Stock?• I – Institutional Sponsorship• M – Market Direction: How Can You Determine it

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* How to Make Money in Stocks: Complete Investing System, William J. O’Neal, McGraw Hill, 2011, Chapters 3 - 9

AAII, Computerized Investing, 2nd Qtr, 2013 Article“A CANSLIM Screen with No Float, but Plenty of Lift”

• Discusses 3 Variations on CANSLIM– The “Original” CANSLIM (2nd edition of O’Neil’s Book, 1991,5)– The Revised CANSLIM (3rd edition of O’Neil’s Book, 2002)– A “No Float” Strategy (Proposed AAII variation)– Indicates CANSLIM can overly restrict investment opportunities (few passing stocks)

• Variation Overview (see article for details)– Earning and Annual Sales Growth over 3 years (3rd ed) versus 5 years (2nd ed)– Lower available Shares, recognizing that “stocks with or reasonable number of shares will, all

else being equal, usually outperform older large-cap stocks”– AAII decided to test the revised CANSLIM without the float requirement (e.g., “Maximum

shares outstanding/float criteria”)

• Results: the “No Float” strategy outperformed the Revised CANSLIM, but not the Original CANSLIM.

– See next slide

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AAIIPerformance of CANSLIM Approaches vs. Benchmark*

(Through 2/28/2013)

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Ann'l Risk

Adj*** %Value of 1K Invest.***

Avg. No.

Passing

Stocks

Price Gain (%)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 YTD**CANSLIM* 79.0 (3.8) 24.1 29.5 30.4 (10.5) 97.3 (9.6) (10.2) 18.0 12.1 14.8 $30,764.78 7.0 CANSLIM No Float* 55.8 8.2 13.3 12.8 35.4 (49.7) 36.9 20.6 (3.9) 8.9 6.8 12.5 $ 9,874.94 16.0 CANSLIM Rev. 3rd Ed.* 74.7 (2.6) (1.0) (5.4) 31.4 (26.3) 16.8 42.7 (30.1) 7.3 9.5 9.7 $ 8,516.89 8.0 S&P 500 26.4 9.0 3.0 13.6 3.5 (38.5) 23.5 12.8 0.0 13.4 6.5 2.6 $ 1,565.03 -All Exchange-Listed Stocks 81.1 22.8 4.5 17.2 (4.5) (46.3) 65.8 26.2 (12.3) 14.8 7.6 7.8 $ 4,085.91 -

* Price performance of hypothetical porfolio rescreened and rebalance Monthly using month-end prices and no transaction costs.** Data as of February 28,2013.*** From December 31, 1997, through February 28, 2013

Recreated Table from:AAII Computerized Investing, Second Quarter 2013“A CANSLIM Screen with No Float but plenty of Lift”By Wayne Thorp

IBD’s 20 Rules To Finding Winning Stocks

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Source: IBD Daily, 4/19/2013

Alternative CANSLIM Indicators

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CANSLIM Indicator Potential Alternative IndicatorRelative Strength ROC, RelSt per this presentationMarket Direction (Distribution, Accumulation Days)

Weekly MAs, MACDsVZO, PZO Indicators1 (volume based like IBD’s methods)

Fundamental IndicatorsQuarterly, Yearly

Earnings;Sales, ROE, etc

AAII Stock Investor Pro~$200 per year

Stock Chart Reading Read IBD Daily explanationsMany technical Indicators:

MAs, MACDs, RSI, ADX, etcStocks & Commodities Magazine2

1. Volume Zone Oscillator (VZO) and companion Price Zone Oscillator (PZO) are discussed in Stocks & Commodities Magazine, by Walid Khalil and David Steckler, May, June 2011.

2. Stocks & Commodities Magazine has monthly articles on many technical indicators and software/firmware sources for many charting tools.

AAII’s Stock Investor Pro Tool• Windows-based (including Windows 7, 32- & 64-bit)• Powerful fundamental screening system providing 60+ preinstalled screening

strategies• Ability to create your own screens• NYSE (2,658), Amex (363), NASDAQ Capital, Global and Global Select markets

(2,613) and NASDAQ Bulletin Board • stocks (4,403)�• ADRs (503), REITs (257) and closed-end funds (830)�• Industry data: 12 broad sectors and 102 industries (Reuters)• Fundamental data supplied by Thomson Reuters and earnings estimates supplied by

I/B/E/S• Covers over 10,000 companies (as of 9/30/2011)• Depth of company data 2,200+ Fields per company• Company financials latest 7 years & 8 quarters of detailed income & cash flow

statements and balance sheets• Earnings estimates quarterly & annual EPS estimates and long-term grow estimates

along with recent surprise data • Pricing Date: 10 years of monthly h/l/c/v

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Source: AAII web site, 4/18/2013

Excel Block Diagram: Data, Storage, and Calculation

Access/2010~1000 Symbols:

Price: Open, High, Low, Close, Volume, Relative St.

Data Storage

YahooWeb

Stock Prices & Volumedownload

Excel/2010/VBACharting

Indicator Calculations (MA, MACD)RelSt indicators calculated in Excel on 

Price/Volume Download

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ADOto 

Access Data

Workbooks.Open("http://ichart.finance.yahoo.com/table.csv?s=QQQ")

VBA Statement to download QQQ

Relative Strength Ranking & Percentile Calculated after Price Data Download

SQL used to sort as required

Stock Price/Volume Data

Yahoo Data Source• www.finance.yahoo.com• End of Day (EOD) Data• EOD data typically fully available by ~9 – 10 pm on trading days• Data Downloaded: Date, open, High, Low, Close, Volume, and Adjusted Close• Only Adjusted Close accounts for splits and dividends• Initial download of all historical data for a Symbol requires a special setup in

automation• ROC by Symbol & Date efficiently calculated on Download• Rank and Percentile by date and ROC must be calculated later• Subsequent daily updates via automation• Mutual Funds, indices, sectors, etc.

• ~1200 Symbols in current data base(s)• 8000+ Symbols can be accommodated in Access, but download time

would be long• Stock Symbols in following Relative Strength Studies (~970 Symbols) as of

March 2013• S&P 500• NASDAQ with Market Cap greater than $1.1B• IBD50

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References

• Charles K. Kirkpatrick & Julie R. Dahlquist, Technical Analysis, 2007, FT Press• Charles K. Kirkpatrick, Invest by Knowing What Stocks to Buy and What to Sell,

2008, FT Press• How to Make Money in Stocks, William J. O’Neil, 2011, McGray Hill• Gil Morales & Dr. Chris Kacher, Trade Like and O’Neil Disciple, 2010, Wiley• Investors Business Daily (IBD) various issues in recent years• American Association of Individual Investors (AAII): AAII Journal, Computerized

Investing Quarterly, Web Site, etc.

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Relative Strength Indicator Goals

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Current Date

Time

Previous Date - i Future Date + j

Known Current RS Ind.ROCi

Unknown Future RS Ind.ROCi

Claimed by Many: Relative Strength Percentile Rank in top 10% Decile (or some upper percentage) will often identify stocks in upper 10% Decile at later dates.This will be demonstrated.

Relative Strength Requires:1. Relative Strength Indicator, ROCi or Alternative;

Sorted by Symbol and Date2. Relative Strength Rank and Rank Percentile: Sorted

by Date and Relative Strength3. 2 proved more difficult than 1

Relative Strength Indicators Used Herein

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= =  1 = +/‐ Percent of Close change, i time later

ROC or Rate of Change

Note: 3m = 63 trading days, 6m = 125 trading days, 12m = 250 trading days

0.4 0.3 0.3It has been reported that above is IBD’s Relative Strength Indicator

IBD considers their RS Indictor to be Proprietary, so it may or may not be

We will use the following RS Indictors: ROC63, ROC125, ROC250, RelSt

Comparison Study RS Indicators with IBD RS Indicator

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ROC-3Month with IBD RS Ind. ROC-6Month with IBD RS Ind.

ROC-12Month with IBD RS Ind. ROC-RelSt with IBD RS Ind.

Count = Number of (Study_RS – IBD_RS) in Histogram

Source: James Pujals, based on IBD_RS indicators from IBD Daily, 2007  ‐ Present and our calculated Study_RSIndicators

Relative Strength Histogram (26,26)

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10%20%30%40%50%60%70%80%90%100%

0%10%20%30%

40%

50%

60%

70%

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

63.95%

Future RelSt Decile

Percen

tage

 in Decile

 Bins

Current RelSt Decile

Histogram: Decile RelSt Current, Decile RelSt Future

Future Relst Decile0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Curren

t Relst Decile 10% 41.67% 11.98% 8.20% 6.79% 5.76% 5.32% 5.01% 5.06% 5.37% 4.84%20% 10.98% 19.19% 16.54% 13.24% 10.87% 8.79% 7.07% 6.33% 5.11% 1.90%30% 7.27% 15.92% 17.25% 15.27% 13.46% 10.96% 8.23% 6.15% 4.13% 1.36%40% 5.17% 13.20% 15.27% 16.04% 15.10% 13.31% 9.98% 6.79% 4.01% 1.12%50% 4.42% 10.70% 12.73% 15.14% 16.39% 15.42% 11.81% 7.87% 4.42% 1.08%60% 4.02% 8.61% 9.99% 12.31% 14.75% 16.93% 15.62% 10.79% 5.62% 1.35%70% 3.66% 7.64% 7.91% 9.10% 10.64% 14.31% 18.83% 16.53% 9.25% 2.13%80% 3.59% 6.73% 6.48% 6.62% 7.26% 8.94% 14.12% 22.66% 19.07% 4.53%90% 4.09% 5.23% 4.96% 4.96% 5.01% 5.45% 8.03% 14.02% 29.28% 18.97%100% 2.18% 2.18% 2.17% 1.98% 1.97% 2.24% 2.82% 5.24% 15.28% 63.95%

Current ROC26Future ROC26Time: 2000 - 2011

Relative Strength Histogram (RelSt,26)

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10%20%30%40%50%60%70%80%90%100%

0%10%20%30%

40%

50%

60%

70%

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

65.08%

Future RelSt Decile

Percen

tage

 in Decile

 Bins

Current RelSt Decile

Histogram: Decile RelSt Current, Decile RelSt Future

Future Relst Decile0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Curren

t Relst Decile 10% 41.80% 12.13% 8.19% 6.86% 5.75% 5.34% 4.98% 4.99% 5.41% 4.56%20% 10.82% 18.86% 16.66% 13.67% 11.23% 9.05% 7.05% 6.17% 4.73% 1.77%30% 7.01% 15.88% 17.16% 15.41% 13.63% 11.10% 8.24% 6.28% 4.07% 1.22%40% 5.16% 13.20% 15.49% 16.57% 15.46% 12.96% 9.83% 6.41% 3.87% 1.06%50% 4.29% 10.24% 12.86% 15.06% 16.61% 16.08% 11.95% 7.68% 4.21% 1.02%60% 4.02% 8.77% 9.97% 12.12% 14.73% 17.18% 15.98% 10.69% 5.30% 1.24%70% 3.69% 7.64% 7.77% 8.56% 10.23% 14.03% 19.14% 17.65% 9.34% 1.94%80% 3.87% 7.00% 6.39% 6.61% 6.93% 8.44% 14.02% 22.89% 19.52% 4.33%90% 4.16% 5.58% 5.04% 4.74% 4.80% 5.39% 7.46% 13.60% 30.19% 19.02%100% 2.23% 2.10% 1.96% 1.85% 1.84% 2.11% 2.87% 5.08% 14.88% 65.08%

Current RelStFuture ROC26Time: 2000 - 2011

Historical Relative Strength Performance

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Future ROC3 Month 6 Months 12 Months

Curren

t ROC 3 Month 73.61% 67.75% 58.88%

6 Months 69.32% 63.95% 55.82%

12 Months 62.41% 57.74% 50.94%

RelST 70.51% 65.08% 56.98%

Percentage Current ROC between 90‐100% Percentile andFuture ROC between 90‐100% Percentile

Future ROC3 Month 6 Months 12 Months

Curren

t ROC 3 Month 50.05% 42.35% 27.68%

6 Months 49.22% 41.47% 26.78%

12 Months 48.03% 40.14% 25.44%

RelST 49.54% 41.80% 27.04%

Percentage Current ROC between 0‐10% Percentile andFuture ROC between 0‐10% Percentile

Charts can be produced for all above results

Relative Strength in Stock Charts

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Conclusions

• CANSLIM Methods can be utilized with alternative indicators• Relative Strength does provide ability to screen for probable winning stocks• Relative Strength is very useful in charts to detect uptrends or downtrends• Best Successes are undoubtedly achieved by:

• Studying Indicators and understanding strengths and weaknesses• Devoting time to develop chart pattern recognition skills

• Effective use of Money Management to minimize losses when strategies are unreliable and run with winners when reliable

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