A Simple Way to Beat the Market

CAN SLIM is a stock selection method based on the classic best seller book “How to Make Money in Stocks: A Winning System In Good Times or Bad” (first edition in 1988) written by William J. O’Neil. He also founded the brokerage house William O’Neil & Co. Inc and business newspaper & website Investor’s Business Daily. In 2018, The CMT Association honors William J. O’Neil for his lifetime contributions to technical analysis.

CAN SLIM is a growth stock investing strategy that identifies seven characteristics of high-performing stocks before making big gains. It combines fundamental analysis and technical analysis. The seven characteristics and also the acronym of CAN SLIM are:

  • C stands for Current quarterly earnings. Compare to the same quarter of previous year, current quarterly earnings should be up at least 25%.
  • A stands for Annual earnings growth. For the last three years annual earning should be growth at least 25%.
  • N stands for New product or service. The company should have innovative product. For example when Apple launch its iPhone.
  • S stands for Supply and demand. Increasing in price should be accompanied by increasing volume as a proxy of increasing demand of the stock.
  • L stands for Leader or laggard? The stock must be the leading stock in a leading industry. O’Neil use qualitative measure (actually can be quantified) by visually see the Relative Strength (it has nothing to do with Welles Wilder’s relative strength indicator (RSI)). In this Comparative Relative Strength the price of one stock divided by broad market index (e.g. S&P 500) and the comparison is then plotted in continuous line. Rising Relative Strength means the stock is outperforming the market and declining Relative Strength means the stock is underperforming the market. A rising line does not have to increasing the stock price, it’s merely the stock is outperforming the market.
  • I stands for Institutional sponsorship. The stocks must be already owned by institutional institution like mutual funds, hedge funds, etc.
  • M stands for Market Direction. The O’Neil’s method only buy when definite uptrend in broad index like S&P 500 and confirmed by three out of four stocks follow the general market direction.

Buy points for this strategy is when the stocks emerge form price consolidation (the price consolidated for at least 7 weeks) and mostly in form of “cup-and-handle” chart pattern. Risk management for this strategy is very clear, it encourages cutting all losses at no more than 8% below the buy point (with no exceptions).

Example of a CAN SLIM chart. A “Cup and Handle” pattern and rising Relative Strength

Now, we can invest in IBD 50 ETF, an ETF that use CAN SLIM strategy. So far, IBD 50 ETF outperforms S&P 500 significantly.

IBD 50 ETF (blue) outperforms S&P 500 (red) significantly

In the era of artificial intelligence and quantitative investing like today, we tend to make everything complex. We tend to search the answer for every phenomena. However, investing in stock market does not have to be complex. Even a simple strategy can beat the market. For further explanation about this strategy you can read the book.

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