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Stock Market Setups
Decisions to buy or sell shares are based on some principles or reasons. These could be Technical, Fundamental, news driven, impulsive. One of the most successful and widely used models for trading has been promoted by William O’Neil and David Ryan – the CANSLIM model. O’Neil wrote about the model in his book How to invest in stocks.
William O’Neil’s CANSLIM Model
CANSLIM is an acronym – with all the letters standing for setups.
C stands for current earnings per share. The company should have recorded an increase of 70 percent over the same quarter a year ago.
A is for annual earnings. For the last 5 years the company should have recorded an earnings growth of at least 25 percent compounded per year.
N stands for something new about the company. This new factor could be a new product or service, a change in management or even a change in the industry. It also means that the stock has reached a new high price.
S refers to the share capital of the company. O’Neil did a study of the best performing stocks and found that their average capitalization was small.
L means leader. O’Neil believes in a relative strength model of the market. I think he wants the stock should have a relative strength better than 80% of all stocks in the market.
I represent institutional sponsorship. It usually takes some institutional sponsorship to produce a leading stock. But a lot of sponsorship is not desirable since there would be a lot of selling if anything went wrong. Also, by the time all institutions have found it, it is probably too late to expect a good move.
M in the formula stands for what the overall market is doing. You want the overall market direction to be favorable before buying the stock.
Does CANSLIM work?
Reports suggest that O’Neil has been a successful investor/trader. He does not hold stocks forever. He also has rules to exit stocks if some conditions are triggered. This makes him an active trader / investor rather than a buy and hold investor
