Mastering

the Market
POWERING YOUR PORTFOLIO WITH MARKETSMITH
Foreword

I’m excited that you’ve chosen to become a MarketSmith and made the commitment to take
charge of your investment life. Imagine, from now on, you own your upside and control your
downside. It’s a powerful personal position to take.

You bring that take-charge intention, and MarketSmith gives you nearly everything else
you’ll need. This guide explains how. The first section takes you on a tour of the MarketSmith
platform, so you can get your bearings and be ready to work. The second section steps you
through the key pieces of investment research you can put into practice to stay on the right side
of any market, and in tune with your investment style.

Seasoned and novice investors alike will find this guide offers many best practices to increase
your probability of success. The investment team that helped develop MarketSmith is the same
team that put together this reference guide. Their knowledge, built over decades, will show you
how to not just survive but thrive through a wide variety of market cycles.

This next point is crucial. We wish the market only went up, but we all know that reality is a
lot more volatile and many times worrisome. MarketSmith helps by keeping you from getting
too caught up in the emotional side of investing. By focusing on your routine, the daily market
action, and its effect on stocks in your portfolio or watch list, you are much less likely to make
costly investing mistakes.

I am confident that, as you begin using MarketSmith, you’ll find that it saves you valuable time,
deepens your market knowledge—and fuels your instincts—for improved portfolio performance.

Happy Hunting!

Scott St. Clair

Premium Product Group Manager
Investor’s Business Daily
 TABLE OF CONTENTS
Using MarketSmith

Getting Started
Signing In.................................................................................................................. 5

Charts
Charts Overview..................................................................................................... 6
Stock Ideas............................................................................................................... 7
Pattern Recognition............................................................................................... 8
Using Pattern Recognition.................................................................................... 9
Alerts....................................................................................................................... 10
Chart Legend.......................................................................................................... 11
Related Information Panel...................................................................................12

List Panel
List Panel Overview..............................................................................................13
Creating Lists......................................................................................................... 14
Customizing Your View.......................................................................................15
Reports.................................................................................................................... 16
MarketSmith Growth 250 Report.....................................................................17
MarketSmith Growth 250 Report and Pattern Recognition...................... 18
197 Industry Groups............................................................................................ 19

Stock & Fund Screener

Screens, Alerts, and Notes................................................................................ 20
Screener Overview................................................................................................21
Preset and Shared Screens.................................................................................22
Customizing the Screener..................................................................................23
Index of Screenable Criteria..............................................................................24

Support Resources
MarketSmith Mobile...........................................................................................26
MarketSmith Tutorial..........................................................................................32
Help Menu.............................................................................................................35
Education and Support.......................................................................................36
 Applying MarketSmith

Chapter 1
Identify Winning Stocks................................................................................39

Chapter 2
Time the Market................................................................................................53

Chapter 3
Buy Right, Sell Right........................................................................................ 61

Chapter 4
Develop a Routine............................................................................................73

Chapter 5
Evaluate Sponsorship & Industry Groups.............................................. 81

FURTHER STUDY
These icons will direct you to resources you can use to deepen your understanding of the topics in this section.

Webinars: These web-based presentations are

accessible at your convenience in the LEARN section
of MarketSmith.com.

Case Studies: Use MarketSmith charts to view added

examples of stocks and indices that further illustrate
market concepts and terms.
Using MarketSmith: Getting Started Subhead

Using
MarketSmith

Page 4
 Geting Started
Using MarketSmith: Getting Started Signing In

Signing In
To sign in, go to marketsmith.com. Select the orange button at the upper right of the screen, type in your email
and password, then select Go. You will be taken to the MarketSmith membership home page featuring custom-
izable RSS feeds, current market conditions, and MarketSmith University.

Important: some browsers have built-in pop-up blockers that prevent MarketSmith charts from opening prop-
erly. If you are having trouble accessing your charts, go to investors.com/marketsmithpopup for instructions
on how to fix this.
Sign in at marketsmith.com

MarketSmith University

Questions? (800) 831-2525 | [email protected] Page 5

Using MarketSmith: Charts Charts Overview

Charts Overview
MarketSmith provides daily, weekly, monthly, and intraday stock charts that display both fundamental and
technical data. To pull a specific chart, type in the symbol of the stock, mutual fund, industry group, or index in
the top left corner box and press enter.

Switch between daily, weekly, monthly, The Tool icon opens a drop-
and intraday charts. down box for personalizing
your MarketSmith experience.
Change the chart date to view
Enter the symbol here. historical charts dating back to 1962. Click the Alerts icon to
manage, view, and set alerts.

Insider Buy/Sell Transactions Relative Strength Line

Fundamental Data

Page 6
 Stock Ideas

Stock Ideas

Charts
MarketSmith makes it easy to find better investment ideas. Clicking or tapping on the “Stock Ideas” button at
the top of the screen (represented by an illuminated light bulb) will open a window that gives you a multitude
of ways to find top stocks.

Here you’ll find premium curated lists like Growth 250, IBD 50 and Top Rated IPO’s, as well as constantly-
refreshed lists like Breaking Out Today and Near Pivot. In addition, you’ll find screens that filter through stocks
as well as quick links to the latest MarketSmith market analysis and webinars hosted by our Product Coaches.

BATS data indicator Stock Ideas Enable BATS Real-Time data here

BATS: Real-Time Reference Data

Real-time pricing data provided by BATS is free with your MarketSmith subscription. When this feature is
activated, the BATS data indicator will be green. To turn the feature on or off, click on the settings menu in the
top right corner.

Questions? (800) 831-2525 | [email protected] Page 7

Using MarketSmith: Charts Pattern Recognition

Pattern Recognition
Our proprietary pattern recognition will display base patterns on both daily and weekly charts. It is designed
tyo help you identify some of the more common patterns, such as cup with handles and flat bases. To turn on
pattern recognition, click on the icon in the upper right corner of chart.

Pattern Recognition button

Profit-Taking Zone: 20-25% above Pivot

Buy Zone: 0-5% from Pivot (dotted line)

Loss-Cutting Zone: 5-8% below Pivot

Page 8
 Using Pattern Recognition

Using Pattern Recognition

Charts
VIEWING BASE PATTERN PROPERTIES
Pattern Recognition includes base properties in a hover box to help you
effectively analyze the quality of a base. To view the hover box, place your
cursor on the base pattern.

BASE PATTERN TYPE

Available base patterns: Cup, Cup with Handle, Saucer, Saucer with Handle,
Double Bottom, Flat Base, Ascending Base, Consolidation and IPO Base.

STAGE
It is important to know where a stock is positioned in relation to the number of bases
it has formed. Stages begin at one and increase with each subsequent base pattern
formed. Stocks emerging from third, fourth, or later stage bases are late in their
moves and may be more likely to fail. Breakouts from first and second stage bases
generally have a higher probability of success.

The magnitude of the move between two base patterns will determine whether the stage moves numerically or
alphabetically. If the price move from the pivot point of the prior base to the left side high of the current base is 20% or
more, the stage will increase by a factor of 1—for example, from Stage 1 to Stage 2. If the price move is less than 20%, the
stage will increase by an alphabetic factor—Stage 1a to Stage 1b.

COUNT
The Count is the number displayed in ( ) to the right of the Stage. Count begins
at 1 and increases numerically with each new base pattern, regardless of the
magnitude. It is the raw count of the number of bases since the last reset. At
this time, the Pattern Recognition software does not take into account bear or
bull markets when counting bases.

Note: IPO Bases do not display either Stage or Count, as neither is applicable
for that particular pattern.

PIVOT
The Pivot is indicated for each base. This value corresponds to the dashed Pivot Line. The raw value is marked without any
additional amount added (e.g., 10 cents).

The Pivot of a base corresponds to a previous area of resistance. In the case of a Cup (or Saucer) With Handle, it
corresponds to the peak price of the handle. In the case of a Double Bottom, the Pivot corresponds to the top of the middle
peak of the W shape. In the case of a Cup, Flat Base, Consolidation, or IPO Base, the Pivot corresponds to the Left Side
High that began the base. When a stock breaks above this level of resistance, it may be poised to move higher.

Questions? (800) 831-2525 | [email protected] Page 9

Using MarketSmith: Charts Alerts

Alerts
Our alert feature will allow you to stay on top of any stocks without having to watch the screen all day. There
are a couple of types of alerts you can set. The basic price alert will trigger if the stock reaches the pre-set
price you have identified, whether it is above or below the current price.

Trend line alerts are also available. By drawing a trend line with your temporary line pen, the MarketSmith tool
will alert you when the stock price breaches that trend. It will extend out and “follow” the stock so you do not
have to worry about adjusting it later on.

Lastly, you can set alerts using the Pattern Recognition algorithm. If a stock breaks out of a base, the alert will
trigger based on the pivot price.

The alerts can be emailed to you and will trigger whether you have your MarketSmith open or not.

Triggered Alerts indicator

Manage Alerts

Page 10
 Chart Legend

Chart Legend

Charts
Find the definition of each of the components of the daily, weekly, and monthly charts and pattern recognition
by accessing the Chart Legend at the bottom left corner of the stock chart or by selecting the Chart Legend
from the Chart Tools ( ) drop-down menu. For more comprehensive information on reading stock charts,
please refer to the Learn section of marketsmith.com.

Chart Legend

Hover over any feature. Feature description appears here.

Questions? (800) 831-2525 | [email protected] Page 11

Using MarketSmith: Charts Related Information Panel

Related Information Panel

Related Information for each stock, fund, or index appears on the sliding panel to the right of each chart. Open
the panel for a stock to reveal in-depth information, including a stock’s institutional ownership, industry and
sector, news, and options data. MarketSmith also provides a Checklist to see how your stock measures up to
the trading strategies of investment legends such as William J. O’Neil, Warren Buffett, and Peter Lynch.

Move between buttons

for in-depth analysis.

Click the Related Information tab

to hide or expand the window. Help Menu

View all stocks in Industry

Group or Sector.

Page 12
 Using MarketSmith: List Panel List Panel Overview

List Panel Overview

The MarketSmith List Panel serves as an area to organize and manage your investment research. Create new
lists, view saved lists, and share lists with the MarketSmith community. Also access proprietary MarketSmith
preset lists in the Reports and Markets/197 Industry Groups folders to generate new stock ideas.

List Panel
The lists are categorized by
folder. Find pre-set lists under Play a stock or fund list as a slideshow.
Reports and Markets/197 Control the interval speed from the
Industry Groups. pull‑down menu ( ) to the right.

Double-click on any stock Use List Panel Tools to customize

to pull up the chart view. column headings, print, and export lists.

The List Panel features column headings

which can be expanded or contracted. Use List Panel Help to get information
Drag and drop columns to reorganize. about List Panel features.

Questions? (800) 831-2525 | [email protected] Page 13

Using MarketSmith: List Panel Creating Lists

Creating Lists
Innovative list design allows you to collect and organize ideas as you conduct your research. To create a new
list, start by selecting the New button in the List Manager. A new list will appear at the bottom of the My Lists
expanded view, called Untitled List; click the box to enter a name for the new list. Add stocks to your new list
by dragging single or multiple rows of stocks, funds, or Industry Groups from other lists in the List Manager.

Click New > List to create and name a

new list in the List Manager.
Use the Add to List button to add the
stock chart you are viewing to a list.

New stocks can be added to your list Click here to find import, export,
by dragging and dropping symbols and print stock lists options.
from reports and screen results, or
typing symbols directly into the cell.

Page 14
 Customizing Your View

Customizing Your View

List management functions allow you to continually customize what information is displayed on your lists with
a choice of over 250 data points available.

List Panel
Customize the layout of your list
display by selecting the Custom
Column Layout option from the
List Tools ( ) menu.

Select a category, then click

and drag the specific criterion
to the column layout preview.

Save and name your layout, then apply Click any title header to sort
the changes to your current list. the list by that category.

Questions? (800) 831-2525 | [email protected] Page 15

Using MarketSmith: List Panel Reports

Reports
MarketSmith Reports run preset screens against the O’Neil Database® to create specialized lists for stocks,
mutual funds and industry groups. From these lists, you can filter stocks or funds based on your specific
performance criteria.

Select a Report from Stocks, Report contents are displayed to the right.
Industry Groups, Mutual Click on any list item to launch its chart.
Funds, or Options sub folders.

Click on the information icon to display Click the icons to adjust the
the properties of a particular list. List Panel view.

The O’Neil Proprietary 197 Industry

Groups can be accessed here, along
with market indices such as the DJIA
and S&P 500.

Page 16
 MarketSmith Growth 250 Report

MarketSmith Growth 250 Report

The MarketSmith Growth Report is a premium report created by the portfolio managers at William O’Neil +
Co. The weekly list is generated through a highly complex screening process to identify stocks poised for sig-
nificant growth. It was designed to save you time on your research routine, by pre-scanning our database and

List Panel
providing the best potential names week-to-week. The list will fluctuate between 100 and 300 names (based
on market action) but will normally be around 250 ideas.

Click for MarketSmith Growth 250 report.

Questions? (800) 831-2525 | [email protected] Page 17

Using MarketSmith: List Panel MarketSmith Growth 250 Report and Pattern Recognition

MarketSmith Growth 250 Report and Pattern Recognition

The combination of the Growth 250 and Pattern Recognition will allow you to view stocks that are currently
building bases or are breaking out of bases each day. There are sub folders under the Growth 250 like Breaking
Out Today and Near Pivot which are related to the Pattern Recognition algorithm. The alerts feature will even
let you see the “Breaking Out Today” stocks as they occur in real time. Growth 250 can also be accessed via
the “Stock Ideas” button.

➊ Breaking Out Today is a list of all the stocks that are breaking out today.
➋ Recent Breakouts are stocks that have broken out in the past 15 days.
➌ Near Pivot is a list of all the stocks approaching a pivot; when stocks break above
that level of resistance, they are often poised to break out.
➍ Tight Areas is a list of stocks showing tight areas, which can serve as alternate
entry points.
➎ Power from Pivot lists all the stocks advancing in price 20% or more within 15 days
(3 weeks) of the pivot point.

Access G250 - Pattern Recognition reports

➊
➋
➌
➍
➎

Page 18
 197 Industry Groups

197 Industry Groups

Stocks don’t exist in a vacuum. A well-run company might seem like a smart investment, but if it’s in a lagging
industry group, that company will be fighting an uphill battle to succeed. That’s why MarketSmith includes 197
different specialized groups to categorize stocks according to industry.

List Panel
The Industry Groups can be sorted by current ranking to help you find the best stocks from the best-
performing industries. After selecting an Industry Group, the stocks in that category will be displayed in the
Related Information panel at right. Selecting the “Top Stocks” button from the related information panel will
give you a list of the top five stocks in the group, along with RS and EPS Ratings. Industry Groups can also be
accessed via the “Stock Ideas” button.

Access Markets/197 Industry Groups under Reports

Questions? (800) 831-2525 | [email protected] Page 19

Using MarketSmith: Stock & Fund Screener Screens, Alerts, and Notes

Screens, Alerts, and Notes

The Screen, Alerts, and Notes helps you filter the database for stock ideas, set price alerts, make research
notes, and participate with other MarketSmith members to discuss and share investing research. You can cre-
ate journal entries related to the specific chart you are viewing or find out what other MarketSmith members
are saying via blogs and forums. This panel also lets you share your stock lists, charts, and analysis with other
members in the MarketSmith community.

The notes feature allows you

to annotate your analysis.

Use Tool Help to get more details about

the Screens, Alerts & Notes panel.

Click this tab to hide or expand the

Screens, Alerts & Notes panel.
Use annotations and advanced
mark-up tools to keep track of
your notes and mark-up the
charts to your specifications.

Page 20
 Screener Overview

Screener Overview
The MarketSmith Screener allows you to filter through our database of 10,000+ stocks and funds to find ones
that meet a specific set of criteria. You can create simple filters for a quick look at what’s moving in the mar-
ket or create complex filters that can be used to spot potential investment candidates. You can also access
the custom screens from MarketSmith’s quarterly Stock Guides, which feature stock screens created by
MarketSmith Coaches and subscribers.

Click on New to create

Set the criteria for your screen.

Stock & Fund Screener

a stock or fund screen.

Access Stock Guide View screen results in the List

screens created by Panel. Results appear dynamically
our product coaches. as you modify criteria.

Questions? (800) 831-2525 | [email protected] Page 21

Using MarketSmith: Stock & Fund Screener Preset and Shared Screens

Preset and Shared Screens

The screener gives members an opportunity to access predefined screens for stocks and mutual funds as
well as benefit from the experience of their peer investors. You can browse members’ screens and share
your own. You can also rate, comment on, and copy other members’ screens.

Click MarketSmith Stock

Screens to browse.

In the Screener, click Browse Screens

to access screens created by other
MarketSmith members.

Tracked screens will be added to your

list of screens.

Page 22
 Customizing the Screener

Customizing the Screener

The MarketSmith screener can be customized to fit any investing style you prefer. With over 130 data points,
the screener is designed to narrow your search for stocks that fit your investing style.

Stock screening categories are neatly organized in specific folders to help you choose where you want to
query our database. Just click on the header to open the folder to view all the items in that specific category.
For example, by clicking on the SmartSelect tab, you are able to view the six criteria related to this folder and

Stock & Fund Screener

choose which items you wish to include in your screen.

Set your screen parameters here.

Select from over 100 criteria here.

Questions? (800) 831-2525 | [email protected] Page 23

Using MarketSmith: Stock & Fund Screener Index of Screenable Criteria

Index of Screenable Criteria

SmartSelect Ratings (6) Average EPS % Change for Last 5 Quarters
Earnings Per Share (EPS) Rating * Average EPS % Change for Last 6 Quarters
Relative Price Strength (RS) Rating * Latest Quarter % Earnings Surprise
Industry Group Relative Strength (Grp RS) Rating EPS Trailing 4 Qtrs Greater Than EPS, 4 Yrs Ago
Sales +Profit Margins+ ROE (SMR) Rating EPS, Lst Fiscal Yr Greater Than EPS, 4 Yrs Ago
Accumulation/Distribution (Acc/Dis) Rating * EPS, Trailing 4 Qtrs Greater Than or Equal to EPS, Lst Fiscal Yr
SmartSelect Composite Rating EPS % Change Current Quarter Greater Than 3-Yr EPS Growth
EPS % Change Current Quarter Greater Than or Equal to
5-Yr EPS Growth
Earnings (36)
EPS Due Date
Sales (12)
% Change in Latest Quarter vs. Same Quarter Prior Year (-/+) *
Current Total Annual Sales (mil)
% Change in 1 Quarter Ago EPS vs. Same Quarter Prior Year
% Change Latest Quarter’s Sales vs. Same Quarter Prior Year *
% Change in 2 Quarters Ago vs. Same Quarter Prior Year
% Change in Latest Fiscal Year Sales vs. Prior Year
% Change in 3 Quarters Ago vs. Same Quarter Prior Year
Sales Have Been Accelerating Over the Latest 2 Quarters (%)
EPS, Trialing 4 Qtrs
Sales Have Been Accelerating Over the Latest 3 Quarters (%)
EPS, Fiscal Year—Last Reptd Yr
Annual % Sales Growth Rate of Last 3 Years
EPS, Fiscal Year—1 Yr Ago
Annual % Sales Growth Rate of Last 5 Years
EPS, Fiscal Year—2 Yrs Ago
Average Sales % Change for Last 2 Quarters
EPS, Fiscal Year—3 Yrs Ago
Average Sales % Change for Last 3 Quarters
EPS, Fiscal Year—4 Yrs Ago
Average Sales % Change for Last 4 Quarters
EPS, Fiscal Year—5 Yrs Ago
Average Sales % Change for Last 5 Quarters
EPS, Fiscal Year—6 Yrs Ago
Average Sales % Change for Last 6 Quarters
% Change in Fiscal Year EPS vs. Prior Year, Last Reptd Yr
% Change in Fiscal Year EPS vs. Prior Year, 1 Yr Ago
Industry & Sector (3)
% Increase in Next Quarter’s EPS Estimate from Same Quarter
Prior Year Actual EPS Company’s Industry Group Rank

% Increase in Current Annual EPS Estimate vs. Last Reported Industry Group Name
Annual EPS Broad Sectors
% Increase in Next Year’s Annual EPS Estimate vs. Current Annual
EPS Estimate
Shares & Holdings (9)
Sustainable Growth Model Projected EPS Growth %
Shares Outstanding (1000’s)
EPS Have Been Accelerating Over the Latest 3 Quarters (%)
Market Capitalization (mil)
Annual EPS % Growth Rate of Last 1 Year
Enterprise Value (mil)
Annual % EPS Growth Rate of Last 3 Years
Sponsorship Rating
Annual % EPS Growth Rate of Last 5 Years
% of Stock Owned by Mutual Funds
Annual % EPS Growth Rate of Last 5 Years Percent Rank
% of the Number of Mutual Funds Owning for Current
Earnings Stability Quarter vs. Previous Quarter
Average EPS % Change for Last 2 Quarters Sponsorship, Mutual Funds Holding Position, Last Reptd Qtr *
Average EPS % Change for Last 3 Quarters % of Stock Held by Management
Average EPS % Change for Last 4 Quarters % of Float Held by Institutions Less Than Database Median

Page 24
 Index of Screenable Criteria (con’t)

Price & Volume (26) Operating Margin Greater Than or Equal to Industry Median
Current Price * Profit Margin Greater Than or Equal to Industry Median
Current Price in Relation to 52-Week High * Cash Flow vs. EPS % Difference— Last Reported Quarter
Price % Change Cash Flow vs. EPS % Difference— Last Reported Year
Price $ Chg ROE (Latest Fiscal Year Reported)
RS Line Making New High ROE, 5-Yr Average
RS Line Making New Low Debt % (Latest Fiscal Year Reported)
Relative Strength, 3 Month Estimated P/E Going Out 1 Year

Stock & Fund Screener

Relative Strength, 6 Month Current Trailing 12 Month P/E
Timeliness Rating P/E vs. Current S&P 500 P/E
Price, % Change vs. S&P 500, 26 Weeks P/E Percent Rank
Volume Intraday (1000s) P/E Number Rank in Group
Current 50-Day Average Volume (1000s) * P/E Less Than 5- Year Average
% Increase in Current Day’s Volume vs. 50-Day P/E to Earnings Growth Rate (PEG)
Average Volume
P/E to Earnings Growth Rate Plus Dividend Yield
Up/Down Volume Ratio (Dividend—Adjusted PEG)
Current 50-Day Average Daily $ Volume (1000s) Current Price to Sales Ratio
Current Price % Above or Below 50-Day Moving Average Price
Current Price to Book Value
Current Price % Above or Below 200-Day Moving
Current Price to Cash Flow
Average Price
Current Enterprise Value to Free Cash Flow
% Price is Up in the Current Week
Current Ratio
% Price is Up in the Latest 1 Month
% Price is Up in the Latest 3 Months Current Yield %

% Price is Up in the Latest 6 Months Long-Term Debt to Working Capital Ratio

% Price is Up in the Latest 12 Months Total Liabilities/Total Assets Ratio Less Than Industry Median

% Price is Up for Year to Date

Current Alpha General Stock Criteria (12)

Current Beta Exchange

Average True Range (30 Days) ADR

ETF/Closed-End Fund
Margin & Ratios (31) ETF
After Tax Profit Margin (Most Recent Reported Quarter) Stock has Options
Average After Tax Profit Margin (Last 2 Quarters) IPO Date
Average After Tax Profit Margin (Last 3 Quarters) Date of Incorporation
Average After Tax Profit Margin (Last 4 Quarters) Company Headquarters—City (US and Canada only)
or Country
Average After Tax Profit Margin (Last 5 Quarters)
Company Description
Average After Tax Profit Margin (Last 6 Quarters)
Headquarters—State or Province
Companies With Accelerating After Tax Profit Margins During
Latest 3 Quarters (%) New CEO in Latest 12 Months
Pre-Tax Annual Margins (Latest Fiscal Year Reported) Company Was Featured in an IBD Article During Last 2 Years

Questions? (800) 831-2525 | [email protected] Page 25

Using MarketSmith: Support Resources MarketSmith Mobile

MarketSmith Mobile
MarketSmith is mobile! Our industry-leading app brings all the powerful MarketSmith
features to your iOS and Android mobile devices. Your MarketSmith membership includes
access on all platforms: PC, Mac, iOS (phone + tablet) and Android. The diagrams to follow
illustrate how to access the app’s features.

Android App Features

1 MARKET OVERVIEW 4 SCREENS
Presents chart view of Nasdaq, DJIA, NYSE, AMEX. Swipe left View all pre-set and user-customized stock screens to comb
for market news, stocks up on volume, down on volume and the MarketSmith database for targeted stocks
best performing industry groups
5 ALERTS
2 CHARTS Show triggered alerts for that day; set new alerts here
View any stock chart. Open any list and all stocks from the list
6 SETTINGS
will load to “Charts” tab. You can quickly scan all charts in list
App settings include Pattern Recognition, Moving Average,
by swiping left
BATS Real Time Price data, feedback, and help & support
3 LISTS
Reveals all custom and pre-set stock lists. Growth 250 stock
list appears in this tab under reports

2
3

Page 26
 MarketSmith Mobile (con’t)

MarketSmith Mobile (continued)

Android App Features
1 NAVIGATION MENU 8 PRICE BARS
Tap here to get menu option Represents price movement during particular period of time.
Tap and hold on chart for track price function. View vertically
2 SYMBOL INPUT FIELD
or horizontally
Tap here to change stock symbol
9 PRICE SCALE
3 PERIODICITY OPTIONS
Numeric scaling to track price. Tap to switch between linear
Change between daily, weekly, monthly, & intraday
and logarithmic
4 ADD TO LISTS
10 PATTERN RECOGNITION
Tap (+) sign to add current stock to different lists
Displays past and present base patterns plus action zones:
5 RELATED INFORMATION buy in blue, take profits in green, cut losses in pink
Find news, fundamental data, industry & Sector groups and
11 VOLUME BARS
sponsorship ratings. Tap each section to expand

Support Resources
Represents number of shares traded during specific period.
6 ALERTS Tap on the scale side of the volume bar to adjust scale
Show triggered alerts for that day; set new alerts here

7 EPS INFORMATION
Displays current stock’s EPS Due Date, Reported
EPS information

3
1

2 4

6 5

10

8
11

For more information, check out

marketsmith.investors.com/ms-mobile/
or watch our tutorial videos in “Learn” at
marketsmith.investors.com

Questions? (800) 831-2525 | [email protected] Page 27

Using MarketSmith: Support Resources MarketSmith Mobile (con’t)

MarketSmith Mobile (continued)

iOS App Features
1 SYMBOL INPUT FIELD 6 LISTS
Tap here to change stock symbol Reveals all custom and pre-set stock lists and screens.
Growth 250 stock list appears in this tab under reports
2 PERIODICITY OPTIONS
Change between daily, weekly, monthly, & intraday 7 ALERTS
Show triggered alerts for that day; set new alerts here
3 RELATED INFORMATION
Find news, fundamental data, industry & Sector groups and 8 SETTINGS
sponsorship ratings. Tap each section to expand iPhone app settings include Pattern Recognition, Moving
Average, BATS Real Time Price data, feedback, and help
4 MARKET OVERVIEW
& support
Presents chart view of Nasdaq, DJIA, NYSE, AMEX. Swipe
left for market news, stocks up on volume, down on volume
and best performing industry groups

5 CHARTS
View any stock chart. Open any list and all stocks from the
list will load to “Charts” tab. You can quickly scan all charts in
list by swiping left

1 2

5 6

Page 28
 MarketSmith Mobile (con’t)

MarketSmith Mobile (continued)

iOS App Features
1 ADD TO LISTS: 5 PATTERN RECOGNITION
Tap (+) sign to add current stock to different lists Displays past and present base patterns plus action zones:
buy in blue, take profits in green, cut losses in pink
2 PERIODICITY OPTIONS
Tap to change between daily, weekly, monthly, & intraday 6 VOLUME BARS
Represents number of shares traded during specific period.
3 EPS INFORMATION
Tap on the scale side of the volume bar to adjust scale
Displays current stock's EPS Due Date, Reported
EPS information 7 PRICE SCALE
Numeric scaling to track price. Tap to switch between linear
4 PRICE BARS
and logarithmic
Represents price movement during particular period of time.
Tap and hold on chart for track price function. View vertically
or horizontally

Support Resources
1 2

5
3

Questions? (800) 831-2525 | [email protected] Page 29

Using MarketSmith: Support Resources MarketSmith Mobile (con’t)

MarketSmith Mobile (continued)

iPad App Features
1 SYMBOL INPUT FIELD 6 STOCK PRICE TRACKING
Tap here to change stock symbol (Pointer highlight the plus Tap and hold to track stock price
sign on the chart)
7 LIST VIEW
2 PERIODICITY OPTIONS Choose and switch between full chart and multi charts modes
Change between daily, weekly, monthly, & intraday
8 LIST MANAGER
3 RELATED INFORMATION Reveals all custom and pre-set stock lists and screens.
Find news, fundamental data, industry & Sector groups and Growth 250 stock list and weekly earnings report appear in
sponsorship ratings. Tap each section to expand this tab under reports

4 ALERTS 9 CURRENT LIST

Show triggered alerts for that day; set new alerts and edit View any stock chart on current list. Open any list and al
existing ones here stocks from the list will load to “Charts” view. You can quickly
scan all charts in lists by swiping left. To expose/hide this
5 SETTINGS
section, tap anywhere on the chart
Check chart elements, turn on BATS real time price data, give
feedback, and get help & support

5
2
9

8 7

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 MarketSmith Mobile (con’t)

MarketSmith Mobile (continued)

iPad App Features
1 ADD TO LISTS 6 VOLUME BARS
Tap sign to add current stock to different lists Represents number of shares traded during specific period

2 PERIODICITY OPTIONS 7 SORT ORDER

Change between daily, weekly, monthly, & intraday Sort the order of how the stocks get displayed on any
particular list or report
3 FUNDAMENTAL DATA BLOCK
Get detailed info on EPS, sales, dividend, and more 8 PRICE MEASUREMENT TOOL
Measure the price change between two different dates.
4 PATTERN RECOGNITION
Tap and hold anywhere on the chart to make it appear
Displays past and present base patterns plus action zones:
buy in blue, take profits in green, cut losses in pink 9 EPS INFORMATION
Displays current stock’s EPS Due Date, Reported
5 PRICE SCALE
EPS information
Numeric scaling. Tap to switch between linear and

Support Resources
logarithmic

8
5

7
For more information, check out investors.com/MarketSmithiPad or
watch our tutorial videos in “Learn” at marketsmith.investors.com

Questions? (800) 831-2525 | [email protected] Page 31

Using MarketSmith: Support Resources MarketSmith Tutorial

MarketSmith Tutorial
To help you get started, we suggest using the MarketSmith Tutorial to guide you through key features on the stock
charts and screener. You can access tutorials by clicking the Tool Options ( ) icon in the top right corner of the
stock chart or screener panel.

Once the Tutorial is launched, the Access the Tool Option menu to
Welcome tab will appear in the middle enable or disable the tutorial at
of the screen. any time.

To contact a product coach, click on

the orange Contact My Coach button.

Page 32
 MarketSmith Tutorial (con’t)

MarketSmith Tutorial
Select the Self-Guided Tour tab to begin. The four major areas of MarketSmith will be highlighted, and the
location of each area is marked with a corresponding number.

1. Stock Chart 3. List Panel

2. Screens, Alerts & Notes Panel 4. Related Information Panel

Maximize the Screens, Alerts

& Notes panel by clicking here. Self-Guided Tour

Support Resources

For more details on each feature, click

here to view a help map of the feature.

Questions? (800) 831-2525 | [email protected] Page 33

Using MarketSmith: Support Resources MarketSmith Tutorial (con’t)

MarketSmith Tutorial
The How To tab provides step-by-step instructions. Learn how to find new stock ideas, organize your watch-
lists, identify chart patterns, and much more.

How To

For further guidance, use the Hover Help function in Tool Options to reveal a short
description of each button function.

Access the Tool Option menu to

enable or disable the Hover Help
function at any time.

Page 34
 Help Menu

Help Menu
Look for the ( ) icon to access the Help Menu and activate a map of MarketSmith’s features. Click on any high-
lighted portion of the map to get a detailed description of that MarketSmith feature.

Click the ( ) to access the Help Menu

for each feature.
The Help Menu icon ( ) can Notes & Discussion Stock Charts
be found in the upper right
side of all main feature panels
in MarketSmith.

Related Information

Support Resources
List Manager

Click a highlighted area for

detailed feature descriptions.

Questions? (800) 831-2525 | [email protected] Page 35

Using MarketSmith: Support Resources Education and Support

Education and Support

MarketSmith has many more resources to help you become a successful investor. To learn more about the
helpful features of MarketSmith, check out the Resources and Support sections on our website. Each area
provides important information to make you a MarketSmith.

Learn all about MarketSmith from the detailed

instructions provided for each feature.

Page 36
 Education and Support (con’t)

Education and Support (continued)

Use the SUPPORT section to answer general

investing questions and solve technical issues.

Support Resources
Learn feature use and navigation with
the Video Tutorials.

View exclusive educational webinars.

Questions? (800) 831-2525 | [email protected] Page 37

Applying MarketSmith

Applying
MarketSmith

Page 38
Chapter 1

Identify
Winning
Stocks
One of the keys to continual success in the market is
being able to identify which stocks have the potential to become big lead-
ers in the next bull market cycle. History has proven that leading stocks
will display similarly outstanding fundamental and technical action BEFORE
beginning their tremendous price runs.

MarketSmith charts are designed to help an investor quickly assess a stock’s

fundamental and technical strengths. The chart’s efficiency and our plat-
form's access to institutional quality data are two essential features that help
you identify stocks with the greatest potential.

In this section, we explain how to assess a company’s fundamental and tech-

nical data, before deciding which stocks to buy.
Applying MarketSmith

How Do I Find Stocks That Will Rise in Price?

Imagine capturing Microsoft (MSFT) in 1989 at the very start of one of its big
moves. This big winner and many other leading stocks posted huge earnings
and sales before their tremendous price appreciation. Confirmation of strong
fundamentals can also include return on equity (ROE) and margins (pretax
and aftertax). When a company is exhibiting strong fundamentals, it is usually
leading its industry by offering an innovative product or service. To increase
your chances of owning stocks with excellent profit potential, your first step is
to search for stocks with strong fundamentals.

“In our models of the 600 best-performing stocks from 1952 to

2001, three out of four showed earnings increases averaging
more than 70% in the latest publicly reported quarter before
they began their major price advances.”
— William J. O’Neil

Term: Fundamental Analysis This section covers the basics of fundamental analysis, which includes
The assessment of a company’s a review of a company’s financial health, management, and competitive
financial strength and potential for
growth by focusing on earnings, advantages. We see the decision to buy a stock as roughly 70% fundamen-
sales, and other data derived from tal analysis and 30% technical analysis (covered later). In the stock market,
a company’s financial statements. fundamental analysis allows you to identify companies that are leading their
industry and growing their earnings.

A time-saving way to evaluate stocks using MarketSmith is to use our O’Neil

proprietary ratings and rankings on daily and weekly charts. MarketSmith
displays proprietary fundamental ratings that allow you to easily compare
a stock against all other stocks in the database on a scale of 1-99 (99 being
best) or A-E (A being best). Below you will find a sample of this data. For
more definitions, refer to the Chart Legend link located below the charts in the
MarketSmith tool.

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 Chapter 1: Identify Winning Stocks

Fundamental Data
Key Ratings: Fundamental data on daily and
EPS Rating: This stock's earnings data is weekly charts allow you to quickly
outperforming 99% of all stocks in our database. evaluate a stock's potential.
SMR Rating: This stock’s Sales + Profit Margins +
ROE (SMR) data is in the top 20% of all stocks in
our database.
Acc/Dis Rating: Tracks the degree of institutional
buying and selling of a stock over the last 13
weeks on an A-E scale.
Composite Rating: Combines all 5 SmartSelect
Ratings into one.

What Makes a Stock’s Price Rise?

Without increased earnings, there is little reason for a stock to go up in price.

MarketSmith offers eight quarters and nine years of earnings history (includ-
ing estimates for the next two fiscal years).

Earnings History
Annual Earnings Quarterly Earnings Strong annual and quarterly
earnings often drive

Identify Winning Stocks

rising stock prices.

When looking for potential winning stocks, we are always looking for something
“new,” whether it is new products, new services, or new management, because
something new is usually tied to an increase in company earnings. For example,
Netflix (NFLX) had two big runs. The first was in 2003 with the release of rental
DVDs, and the second was when it introduced online streaming.

Questions? (800) 831-2525 | [email protected] Page 41

Applying MarketSmith

Familiarizing yourself with a stock’s earnings history and story is crucial to

increasing your conviction in its potential. Let’s focus on Netflix (NFLX) in
2010. NFLX had seven quarters of outstanding quarterly EPS and sales and
it was able to advance over 100% during this time. If you assumed that you
missed the majority of NFLX’s move, you were wrong.

Hint In fact, our analysis of the greatest stocks revealed that almost every stock
You can screen for had an acceleration of earnings growth sometime in the 10 quarters before
accelerating earnings in the
MarketSmith Screener. the stock went on its huge move. NFLX had four quarters of accelerating earn-
ings and sales within the seven quarters previous to its first run. It went on to
advance another 394% in 17 months.

Accelerated Earnings and Sales Netflix (NFLX),

Netflix exhibited outstanding December 2010
increases in earnings and sales in
the quarters prior to its 394% run.

Sometimes that “something new” is a product so innovative that it changes

the way people live and work. Sometimes, though, an innovative product
needs time and another catalyst for it to gain mass appeal. For example, the
iPod was introduced in 2001, but it was the launch of the iTunes Music Store
with 200,000 songs at $0.99 that made the iPod a worldwide sensation,
creating a surge in Apple’s earnings and sales. That surge in profits allowed
Apple to innovate further and create the iPhone and iPad, two more world-
wide bestsellers. Reinvesting those profits was key to AAPL becoming one of
the best-performing stocks of the past 10 years. What were Apple’s funda-
mentals before the stock broke out and went up over tenfold in price?

New Innovations Apple (AAPL)

Apple's earnings and sales December 2003
skyrocketed after the launch of the
iPod music player in 2001.

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 Chapter 1: Identify Winning Stocks

Even though the portfolio managers who helped develop MarketSmith are
growth-oriented, they were emphatic about designing it as a style-agnostic
platform, equally relevant to all types of investors. Thus MarketSmith has a
full range of fundamental criteria appropriate for you to make an informed
investing decision according to your style. To speed your analysis, our
Checklists (found in the Related Information Panel) have various sets of pre-
selected criteria to help you quickly analyze individual stocks.

MarketSmith Stock Checklist

Stock Checklist Customizable Stock Checklists
help you quickly analyze
individual stocks.

Identify Winning Stocks

What to Buy? Don’t Overlook Fundamental Stock Analysis

For this webinar and others, please visit:
marketsmith.com/learn/webinars.aspx

Questions? (800) 831-2525 | [email protected] Page 43

Applying MarketSmith

How Do I Read a Stock Chart?

Chart Patterns
Reading chart patterns would
have helped you buy Apple
(AAPL) in 2004, before it
began its 20-fold price advance.

Term: Technical Analysis One of the key things to look for in a stock chart is a chart pattern. A chart
The assessment of a company’s pattern, also known as a consolidation area, is where the stock’s price action
stock price strength and direction,
using price and volume (and/or takes a common path that meets the specific parameters of one of six pat-
indicators derived from price and terns. Even the best stocks will take a break from their ascent to build these
volume) as seen on a stock chart. chart patterns, which are made when a stock falls slightly in price or moves
sideways — meaning the price doesn't rise or fall much. A stock “breaking out”
from a pattern is a technical signal to buy.

Term: Institutional Accumulation Volume data on a stock chart is another way to measure whether a stock is
Refers to the shares of a company strong, healthy, and under institutional accumulation (big funds are buying
bought by an institutional investor
(mutual funds, banks, pension it) or whether the stock is weak, behaving abnormally, and under institutional
funds, insurance companies, etc.) distribution (big funds are selling it). It is difficult to track institutional actions
without consulting a chart, but the big institutional money cannot hide its
actions from the chart. Moreover, charts help you follow hundreds, even
thousands of stocks in a highly organized, time-saving way.

Throughout stock market history, stocks that seem too high in price often go
higher. Ideally, we are looking for stocks in an uptrend that are consolidating
their gains constructively. This “constructive” action can be seen in the chart
patterns identified in the following pages.

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 Chapter 1: Identify Winning Stocks

Chart Patterns

Learning to identify these chart patterns (consolidation areas) will help you By understanding
determine optimum buy and sell points. Remember: The institutions are cre- patterns, you will have
ating these patterns with their trading activity. By understanding patterns, you greater insight into the
will have greater insight into the actions of large players. actions of large players.

MarketSmith simplifies this process by highlighting chart patterns using our

Pattern Recognition feature. For newer investors, seeing these patterns helps
them more easily identify stock trends. For more experienced investors,
Pattern Recognition acts as a time-saving feature by performing calculations
such as the stock’s base stage, length and depth of base, depth of handle,
pivot point, and current percent from pivot.

Flat Base
• Base Length: Minimum
of 5 weeks
• Base Correction: < 15%
• Pivot Point: Left-side high of base

Identify Winning Stocks

Weekly Chart Daily Chart

IPO Base
• Base Length: 2 to 4 weeks
• Base Depth: 0% to 20%
• Pivot Point: Left-side high of base

Weekly Chart Daily Chart

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Applying MarketSmith

Chart Patterns (continued)

Cup With Handle Base
• Base Length: Minimum
of 7 weeks
• Base Depth: 20% - 30%
• Handle Depth: 12% - 15%
• Pivot Point: High of the handle

Weekly Chart Daily Chart

Saucer With Handle Base

• Base Length: Minimum
of 7 weeks
• Base Depth: 12% - 30%
• Handle Depth: 12% - 15%
• Pivot Point: High of the handle

Weekly Chart Daily Chart

Double Bottom Base

• Base Length: Minimum
of 7 weeks
• Base Correction: < 50%
from peak
• Pivot Point: Breakout through
middle of W

Weekly Chart Daily Chart

Greatest Winners: Use the change date feature in

MarketSmith to review these stocks on dates displayed.
NFLX: 8/10/2010 AAPL: 3/4/2004 PCLN: 1/5/2011
GOOG: 4/22/2005 SCHW: 10/15/1998 AMGN: 11/12/1990

Page 46
 Chapter 1: Identify Winning Stocks

Consolidation
• An area of resistance that fails
to form a more defined base

Weekly Chart Daily Chart

Cup Base
• Base Length: Minimum
of 7 weeks
• Base Depth: 20%-30%
• Pivot Point: Left-side high
of base

Identify Winning Stocks

Weekly Chart Daily Chart

Ascending Base
• 3 pullbacks from 10% to 20%,
with each low-point during the
selloff being higher than the
preceding one

Weekly Chart Daily Chart

The Importance of Chart Patterns

For this webinar and others, please visit:
marketsmith.com/learn/webinars.aspx

Questions? (800) 831-2525 | [email protected] Page 47

Applying MarketSmith

Historical Comparisons

You can train your eye to recognize chart patterns by studying big winning
stocks of the past, using the Change Date feature. MarketSmith encourages this
education process by offering a database of charts dating back over 50 years.
By studying the chart patterns of previous big winners such as Xerox (XRX), we
can train our eyes to recognize patterns in future big winners. For example, look
at the similar breakouts of Apple and Xerox below.

Recognizing Chart Patterns

Historical comparison of Before Their Breakouts
Xerox and Apple before and
after their breakouts Xerox (XRX) Apple (AAPL)
April 1963 March 2004

1 Strong Prior Uptrend; 2 Constructive Action (Base Building); 3 Powerful Breakout.

Subsequent Moves
Xerox (XRX) Apple (AAPL)
November 1963 February 2005

Page 48
 Chapter 1: Identify Winning Stocks

Why Follow Institutional Investors? Term: Supply

The amount of a particular
item that is available for sale
in a given market. In the stock
market, it refers to how many
shares are currently being sold
by investors. When supply
Each trading day, the majority of market volume is coming from the institu- exceeds demand, prices fall.
tions (i.e., mutual funds, hedge funds, pension funds, etc). The bottom line is
that the institutions are the ones who move the market, not individual inves-
tors. Institutional buying and/or selling pressure can greatly influence the
price of a stock. Term: Demand
The amount of a particular item
Keep in mind that stocks represent fractional ownership in a company. You that is desired for purchase in
don’t own the company, you own the stock. And that stock price can reflect or a market. In the stock market,
it refers to how many shares
diverge from how strong the company is in your opinion. Analyzing a chart to are currently being bought by
measure the supply of a stock vs. demand for it, will help to keep your opinion investors. When demand exceeds
or emotional connection to the stock out of the equation. supply, prices rise.

Track Price Tool

Track Price Tool To access the Track Price tool

Identify Winning Stocks

in MarketSmith, simply left-
click and hold down the button
on your mouse. You can move
the cursor over particular
price bars for detailed price
and volume information.

Using Volume to Gauge Supply and Demand

For this webinar and others, please visit:
marketsmith.com/learn/webinars.aspx

Questions? (800) 831-2525 | [email protected] Page 49

Applying MarketSmith

It is important to be aware of what the institutions are doing. They are the
ones with the resources to thoroughly research stocks that have the greatest
chance of success. Institutions will often accumulate a position over a period
of weeks or months. The great news is that, during this time, you can “see”
the activity of institutions by observing fluctuations in a stock’s volume.

MarketSmith makes it easy for you to detect above-average trading volume

Historically some of the
with its 50-day moving average volume line. Average trading volume for
biggest stock market
Apple might not be the same as Google’s. To determine the average trad-
winners had volume two
to three times greater ing volume, MarketSmith calculates the trailing 50 days of average trading
than normal on their volume for each stock. Ideally, on days your stock is up, its volume will be up,
breakout day. and on down days we prefer to see lighter trading volume. On a key day, like a
breakout day from a base, we want volume to be unusually high. Historically
some of the biggest stock market winners had volume two to three times
greater than normal on their breakout day.

When researching potential stocks for purchase, we are trying to capture those
stocks with a great chart pattern, outstanding fundamentals, and a large increase
in volume as the stock moves up through the pivot price (buy point). This is the
“tell” for big institutional demand. Unfortunately for us, the institutions don’t
telegraph their intentions when they are trying to accumulate a stock. However,
following price and volume allows us to observe their actions in real time.

The examples on the following page show stocks that exhibited large volume
on breakout days, before they made large price advances.

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 Chapter 1: Identify Winning Stocks

Breakout Days
Breakout Days The day when a stock moves
up in price through the
pivot price (buy point).
Chipotle Mexican Grill (CMG) Google (GOOG)
September 2010 April 2005

Identify Winning Stocks

Greatest Winners
Use the change date feature in MarketSmith to review these
stocks on dates displayed for textbook examples of chart
pattern breakouts.
CSCO: 10/23/1990 PTR: 4/28/2003 BRCM: 11/3/1999
GOOG: 10/21/2005

Questions? (800) 831-2525 | [email protected] Page 51

Chapter 2

Time the
Market
In the stock market, knowing whether the major
indices are in an uptrend or a downtrend is crucial, because three out of four
leading stocks will follow the general trend of the market. Ideally, it is best to
be invested only when the overall market is in an uptrend and to be in cash (on
the sidelines) when the market is in a downtrend.

In this section, we will discuss how you can improve your odds for success in
the stock market by knowing what the market is doing now. Rather than trying
to predict where the market is headed, we watch for signs that help us deter-
mine whether the market is currently in an uptrend or downtrend. We then
take specific, appropriate actions.
Applying MarketSmith

General Market Analysis

Many stock market observers believe market timing is impossible. However,

having studied every market cycle since the late 19th Century, we have
determined that it is possible to successfully time the market using a set of
investing rules.

While stock investing can be tremendously rewarding, it can also be finan-

cially and emotionally difficult to handle. After the dot-com bubble in 2000,
many unsuspecting or ill-informed investors lost 50-80% of their portfolio
values. The 2008 financial crisis also caused a severe market downturn. After
sharp corrections like 2008's, many individual investors lost their confidence
and never returned to investing in stocks. This is unfortunate, because there
are ways to avoid “going off the cliff,” which you’ll better understand after
reading this section.

Term: Bull Market On the opposite end of the spectrum, it’s easy to get caught up in a strong bull
During the average Bull Market, the market and miss signs that the market may be topping, only to watch hard
major indices rise 160% in 3½ years.
earned gains evaporate. Good market analysis can help protect you from both
Term: Bear Market
During the average Bear Market, the of these natural human reactions.
major indices fall 43% in 1½ years.

Search for Trends in the Stock Market

When conducting market analysis, your aim is to spot signs of either strength
or weakness in market action, so that you can pinpoint the market’s overall
trend. With some practice, you’ll start to develop a feel for what a healthy
market looks like, as well as one that isn’t acting right.

Many market observers spend their time focusing exclusively on analysis

of economic conditions to “predict” where the market is headed. While
knowledge of economic fundamentals can be useful, a singular focus on this
approach often proves deficient, because the market tends to lead the econ-
omy, as opposed to the economy leading the market. Thus, most measures of
economic activity are inadequate for identifying key market turning points.

54 54
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 Chapter 2: Time the Market

Instead of relying strictly on an analysis of the business climate, we rely on

two key indicators of a potential trend change. The first is when indices show
signs of weakness, indicating that demand for stocks is waning. The second is
when the indices show signs of strength, signaling that money is coming into
the market. We call these signals Distribution Days and Follow-Through Days,
respectively. If you learn to identify these signals, you’ll be investing in line
with the overall market trend.

Distribution: The Selling Footprint of Institutions

Eventually, every market uptrend reaches a point where selling activity over-
takes buying activity. We call this distribution. A Distribution Day occurs
when an index closes down on higher volume compared to the previous day.

Distribution Days
Market Top, Nasdaq Composite A Distribution Day occurs when a
March 27, 2012 major index is down 0.2% or more,
and the volume is higher than the
previous day. Keep a running tally
of distribution days on the major
index charts.

Time the Market

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Applying MarketSmith

Our studies of every market top going back more than 50 years showed that
five or six days of distribution over a span of four to five weeks is sufficient to
turn a market uptrend into a market downtrend.

Five or six days of After spotting one or two Distribution Days on a major index (over a few
distribution over a span weeks’ time), pay attention to the major market index charts on the follow-
of four to five weeks ing days. If there comes a second and/or third day of distribution, you should
is sufficient to turn a start to prepare for the market to change direction. You may have already sold
market uptrend into a a stock or two. By the fifth day of distribution in five weeks (or fewer), you
market downtrend. should be on alert for the possibility that the market is entering a correction.

At the same time you’re seeing distribution in the market indices, you’ll also
likely see leading stocks—the stocks that have been the best price perform-
ers in that market cycle—show signs of topping. If you see the price of leading
stocks dropping, you have another reason to suspect that the market trend is
changing and that the market is “weakening.”

After you’ve spotted signs of market weakness, you need to take action.
Curtail new stock purchases. Consider raising some cash by selling your weak-
est stocks and get off margin. If the market continues to weaken, you need to
continue to sell stocks and move to cash. You never know how far the down-
trend will go. By taking defensive action, you’re protecting yourself against the
big losses possible during severe corrections.

In a downtrend, we don’t want to lose sight of the best stocks. When the
market is correcting, even the best merchandise will have a hard time going up
in price. Picture a basketball being held underwater. As soon as you let go of
that ball it will shoot to the surface in an instant. The best stocks in a market
downtrend are just like basketballs being “held” underwater by the market.
As soon as the pressure of the market is lifted, these stocks will move into
new high ground very quickly. Your MarketSmith tool allows you to search for
those stocks that are holding up the best with the screening option: Relative
Strength (RS) line hitting new high.

Managing Risk Through Market Directional Analysis

For this webinar and others, please visit:
marketsmith.com/learn/webinars.aspx

56 56
Page
 Chapter 2: Time the Market

“I tried to detect those stocks that resisted the decline. I

reasoned that if they could swim against the stream, they were
the ones that would advance most rapidly when the current
changed…After a while, stocks began to resist the downward
trend. They still fell, but while the majority dropped easily,
following the mood of the general market, these stocks gave
ground grudgingly.”
— Nicholas Darvas, How I Made Two
Million Dollars in the Stock Market

Follow-Through on a Solid Market Rally

Eventually all corrections end, and new uptrends begin. Once the market enters
a downtrend, continue to monitor it closely. At some point, it will rally and
recover for a few days. Many of these rallies will be fake-outs. Wait for confir-
mation that there has been a change in trend to the upside. This comes in the
form of an explosive up day, a Follow-Through Day, signaling that the market’s
trend has changed.

Follow-Through Day
Mark rally Follow-Through
Market Bottom, Nasdaq Composite
March 17, 2003 days on your charts to

Time the Market

signal a new uptrend.

Questions? (800) 831-2525 | [email protected] Page 57

Applying MarketSmith

Term: Follow-Through Day A Follow-Through Day usually happens on the fourth through seventh days of
A Follow-Through Day occurs an attempted rally, but it sometimes can come on the tenth day or later. On
when a major index is up at least
1.4% and volume is higher than the this day, one key market index closes up a powerful and decisive amount, at
previous day. This typically occurs least 1.4% or more, with trading volume higher than the day before.
4 to 7 days after the rally begins.
It is important to remember that when the market follows through, the finan-
cial headlines may still be negative. Most people won’t believe in the rally.
Fear is natural in this case, so it’s crucial that you focus on what the market is
actually telling you—not your emotions or the news cycle.

While no new bull market has started without a Follow-Through Day, not
every Follow-Through Day leads to a change in market trend. A Follow-
Through Day does not mean you should plow in with 100% of your portfolio.
But it does give you the go-ahead to carefully review your Watch List of
high-quality stocks with a view to perhaps making a small purchase of those
at, or approaching, proper buy points. You may want to spread out purchases,
letting the individual stock’s price action confirm that the market’s trend has
truly changed.

Historical Precedent Analysis

Analyzing historical charts can be a helpful guide for interpreting current and
future market trends. On the next page you will find examples of stocks that
followed the market at critical tops and bottoms.

Market Tops & Bottoms

Use the Change Date feature to conduct your own analysis of
historical market events.
S&P 500 (Top): 7/20/1998 S&P 500 (Bottom): 10/15/1988
DJIA (Top): 9/03/1929 DJIA (Bottom): 8/17/1982

58 58
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 Chapter 2: Time the Market

Market Top: March 10, 2000 Most stocks follow the market
Examples of stocks that
Nasdaq Composite JDS Uniphase (JDSU) followed the market at
critical tops and bottoms.

Market Bottom: August 17, 1982

Dow Jones Industrial Average Pulte Group (PHM)

Time the Market

Questions? (800) 831-2525 | [email protected] Page 59

Applying MarketSmith

Page 60
Chapter 3

Buy Right,
Sell Right
Buying and selling stocks can be a very expensive
endeavor if you don’t have sound rules to help you navigate the market. Most
investors who struggle in the market do so because they make buy and sell
decisions based on their emotions (usually fear or greed), which leads to
buying at the top and selling at the bottom.

This section covers optimal times to buy and sell stocks based on 50 years
of equity research at William O’Neil + Company. These investment rules are
based on how the market actually works — not on our opinions. Learning these
concepts will help you participate more fully and confidently in market uptrends
and avoid catastrophic downtrends, like we saw in 2000 and 2008.

Finally, we conclude this section with a brief overview of portfolio manage-

ment and its importance to long-term success in the stock market.
Applying MarketSmith

Stock Selection

The most important factor in buying is market direction. As previously men-

tioned, most stocks will follow the trend of the overall market. In a correction,
or bear market, you should have raised cash (sold your stocks) to protect your
capital, so you can invest it in the next uptrend. During an uptrend, we look for
stocks that have the strongest fundamentals and best technical setups.

When considering the fundamental and technical characteristics of a stock, a

good rule of thumb for buying decisions is to base them 70% on fundamentals
and 30% on technicals. The price action and chart pattern are important to
us, but no stock is going to double or triple because of the chart. Big earnings
and strong sales drive stock prices higher.

In the stock market, there is the best price (the low for which it is impossible
to know at the time) and the RIGHT PRICE. We are trying to buy into a posi-
tion at the correct point on the chart — not cheaply, early, or by happenstance.
That price is the point on the chart known as the “pivot point.”

Track Price Tool

The volume % change figure Track Price Tool
will update as the trading day
progresses. Be aware that the
volume is usually abnormally large
in the beginning of the day. So
take that into account with your
analysis. The longer the market has
been open, the more accurate that
volume % change figure will be.

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 Chapter 3: Buy Right, Sell Right

There are two key attributes of pivot points that must exist in order to buy Term: Pivot Point
a stock. First, a stock’s price must move upward through the pivot point. The point in a chart pattern where
the price needs to break through
Second, we want to see a substantial increase in the normal trading volume before considering it a buy point.
for that stock. Volume can be identified throughout the trading day with the
track price tool in MarketSmith.

Buying Right

You can actually buy a stock too soon as well as too late. To avoid using
a faulty buy point, wait for the stock to “break out” of the base on a large
increase in volume. If you buy too soon, the stock may never break out, and
you will be stuck with a stock that simply goes sideways or lower, giving no
profit or only losses.
Examples of faulty buy points
Faulty Buy Points Beware of buying too
early or too late.
Extended from base, DO NOT BUY Never breaks out, DO NOT BUY

Hint
If you are new to this, use

Buy Right, Sell Right

Pattern Recognition as your
guide to determine whether
the stock is extended.

Questions? (800) 831-2525 | [email protected] Page 63

Applying MarketSmith

To avoid buying too late, we use a 5% range just above the stock’s pivot point
to identify our buying area. Buy the stock as close to the pivot as possible,
after it breaks out. Sometimes a stock moves quite fast, e.g., after an earnings
announcement (see Important Note), that's why daily monitoring of stocks
close to a buy point is so important.

Important Note

Earnings releases can result in a dramatic price action for a stock, so you should
be prepared for such announcements. The earnings release date for every stock
in our database is located in the bottom right corner of the daily chart. If the
date is displayed with an "e," the company has not yet announced the EPS due
date, and we are displaying an estimated date.

Earnings release date

Earnings release dates EPS Due Date
are displayed in the
bottom right corner of
MarketSmith daily charts.

Buy Points
Use the Change Date feature to conduct your own analysis
of historic buy points.
BIDU: 7/15/2009 BRFS: 12/16/2003
MSFT: 9/13/1989 CELG: 9/27/2013
WFM: 3/10/1993 ADBE: 10/14/1986

Using Relative Strength to Identify the Next Cycle of Leaders

For this webinar and others, please visit:
marketsmith.com/learn/webinars.aspx

Page 64
 Chapter 3: Buy Right, Sell Right

Selling

Would you drive your car without the brakes? Would you own a home without Our number one
insurance? Our number one investing rule is to cut ALL losses at 7-8%. This investing rule is to cut
rule insures you against catastrophic losses to your portfolio. ALL losses at 7-8%.

“Cutting losses is the one and only rule of the markets that can be
taught with the assurance that it is always the correct thing to do.”
— Gerald Loeb, The Battle for Investment Survival

We buy based on fundamentals and technicals, but we sell based on technicals We buy based on
alone. Remember, the stock market is anticipating what the fundamentals (of fundamentals and
both companies and the economy) will be in six to nine months. We sell based technicals, but we sell
on technical action, rather than wait for fundamentals to deteriorate. If you see based on technicals alone.
one of these sell signals, sell and don’t wait to learn “why” it is going down.

A key defensive signal is a break of the 50-day moving average line on huge Term: Defensive Sell Rules
volume. The 50-day moving average is a level at which institutions will likely Signs to sell a stock while prices
are falling.
support their positions. The best stocks in the market often test this line dur-
ing their uptrend, but they will rarely fall on huge volume. If a stock breaks the
50-day line on huge volume, it could be a sign that institutions are exiting
their positions. This is a crucial sell signal that could lead to further downside,
and you will want to protect yourself immediately against losses.

Another defensive sell signal is the “largest one-day price drop.” Historically,
after an extended price advance, if the stock takes its largest one-day price

Buy Right, Sell Right

move down since the beginning of the move, consider selling. It is vital not to
hesitate during this type of gap down because the stock can go much lower in a
short amount of time. Don’t hope and pray for a bounce, and even more impor-
tant, do not add to a losing position. Cut your losses and protect your portfolio.

Questions? (800) 831-2525 | [email protected] Page 65

Applying MarketSmith

OpenTable (OPEN)
OpenTable broke through OpenTable (OPEN)
September 2011
the 50-day moving average
line on heavy volume at
the start of its decline.

Knowing when to take a profit

Term: Offensive Sell Rules One offensive sell signal is to take profits when your stock has gained
Signs to sell a stock while 20-25%, rather than sit through a potential new base. Based on history, most
prices are rising.
growth stocks rise 20-30% before building a new base or correcting again.
The only exception to this sell signal is if the stock has unusually strong fun-
damentals and price action, in which case you may want to hold onto your
shares for a longer period of time.

For example, Herbalife (HLF) was up more than 20% out of the base
before plunging:

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 Chapter 3: Buy Right, Sell Right

Lock in Your Gains

Herbalife (HLF) Take profits when the stock
June 2012
price climbs 20-25% above
your purchase price.

By taking profits in this 20-25% range, we accomplish two things. First, it Using proper money
frees up capital you can use to buy another stock more likely to rise in price, management, you can be
while the stock you sold is building a base (or worse, corrects and comes wrong three out of four
back down). Second, it allows you to pay for the losers. Using proper money times, and your portfolio
management, you can be wrong three out of four times, and your portfolio will will remain intact.
remain intact. If you can’t be right more than one in four times then you might
want to study your past buys and sells to analyze why.

For further study, refer to the selling chap- Mock Portfolio

ters in William J. O’Neil’s book, How to Make XYZ -7%

Buy Right, Sell Right

Money in Stocks. ABC -7%
DEF -7%
Note: If you are interested in exploring more sell
GHI +25%
signals, please contact your product coach to
Overall +4%
discuss historical examples.

Questions? (800) 831-2525 | [email protected] Page 67

Applying MarketSmith

Managing Your Portfolio

You’ve analyzed the market to identify its current trend. You’ve analyzed each
stock on both a fundamental and technical basis to identify the best possible
times to buy. Now, we discuss techniques to manage your portfolio — to fur-
ther lock in gains and avoid severe losses.

It’s important to It’s important to remember that your objective in the market isn’t simply to be
remember that your right; it’s to make big money when you are right. Two portfolio management
objective in the market techniques discussed in this section may help you achieve that goal: “concen-
isn’t simply to be right; trating your purchases” and “using proper follow-up buys.”
it’s to make big money
when you are right.
Concentrate Your Purchases

When it comes to the stock market, it’s better to put your eggs in a few bas-
kets and watch those baskets very closely. Owning too many stocks makes
it difficult to understand them all or stay on top of their fundamental and
technical changes. Did diversification protect people in 2000 or 2008? When
the market signals the environment is changing, a broad portfolio of stocks
can slow you down when you should be raising cash (selling). We diversify by
spreading our purchases out over time and by never concentrating too heavily
in one industry group or sector.

Consider putting a strict limit on the number of stocks in your portfolio. Then
enforce this limit by refusing to add a new stock until you’ve sold one you
already own. If, for example, you’ve decided to own no more than 10 stocks,
sell the least attractive of the 10 before making a new buy. How do you know
which is your least attractive stock? Easy, the one in which you are up the
least or down the most.

It’s a good idea to set up a portfolio in MarketSmith with the names you cur-
rently own. For our purposes, we’ll call this list “My Holdings.” Monitor your
holdings list daily, and pay attention to things like Relative Strength and the
price-volume action on the chart to understand which stocks are showing
strength or weakness.

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 Chapter 3: Buy Right, Sell Right

Building a Position

When you buy a new stock, think about not committing your entire position
in one decision. Instead, commit incrementally, making your stock prove its
strength by advancing in price. Say your full position for a stock would be
$10,000. For your first position, you could contribute $5,000 at the start and
then, if the stock continues to advance, add additional, smaller amounts until
you’ve reached your full position.

We call this technique pyramiding or averaging up, because after a larger

initial purchase, you make smaller ones as the stock advances. It’s important
that you buy fewer shares with your second and third purchases to avoid run-
ning up your average cost. Also, avoid making follow-up buys once the price of
the stock is more than 5% above its pivot point.
Price Pyramiding Purchases
Scale A strategy for incrementally
scaling into a position
as prices rise.
20%
Purchase #3
+2.5%

30%
Purchase #2
+2.5%

50%
Purchase #1

Buy Point
(Pivot Price)

“Force Feed” Your Winners

Buy Right, Sell Right

Of every 10 stocks you buy, only one or two will likely be outstanding per- Of every 10 stocks
formers. Your goal is to allocate the most capital to your best stocks. Say the you buy, only one
market has just entered a new rally, and you buy five or six stocks. As the rally or two will likely be
continues, consider selling the stocks in which you are down or the ones that outstanding performers.
are not fully participating in the uptrend. Then use that money for follow-up Your goal is to allocate
buys in the stocks you own that are taking full advantage of the uptrend. This the most capital to
your best stocks.
“force feeding” method of money management reminds you to move your
money into your best-performing stocks.

Questions? (800) 831-2525 | [email protected] Page 69

Applying MarketSmith

Common Portfolio Management 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 break out dur-
ing 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 gen-
eral market pressure eases, these stocks can move up in a hurry.

Term: Shake Out If the market begins a new rally and you don’t have a watch list of stocks
When a short-term loss on a stock to buy, you will likely miss a good portion of this advance. In addition, once
purchase forces an investor to
sell shares during a temporary these stocks move past a proper buy point and you attempt to buy late, you
pullback that is part of a longer risk being shaken out in a normal market correction.
term uptrend in the stock's price.

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 the industry groups that 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
reinvent itself. Don’t just focus on the old leaders. Keep an open mind to new,
innovative companies.

Investing in Companies You Don’t Understand

Evaluating charts and fundamental data is an important part of your analysis pro-
cess, but if you take the time to get to know the companies you are considering
for investment, you’ll be better equipped to interpret the information. If you know
the ins and outs of a company, you should be better able to ride through a normal
correction in a stock without getting shaken out. At the same time, you’ll be more
likely to spot when a company’s period of rapid growth may be nearing an end.

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 Chapter 3: Buy Right, Sell Right

Forgetting About Sales

Earnings growth is the lifeblood of almost all major stock advances. Without
increasing profits, there is little reason for most stocks to go higher. As a
result, it’s important to look for sales growth to accompany that earn-
ings growth. Companies can only grow earnings by cost-cutting so much.
Eventually, to keep expanding earnings, the company must also expand sales.

Looking for Bases Without a Prior Uptrend

All bases should be preceded by a strong prior uptrend of 30% or more. This
uptrend should be accompanied by improving relative strength and a very sub-
stantial increase in volume at points along the way. This action confirms that the
stock has a lot of demand behind it. The subsequent base is usually caused by
general market action, which causes the stock to pause before moving higher.

Not Wanting to Take a Loss

Many investors will refuse to sell a stock that is down because that would If you’re down on a
mean “admitting” they were wrong in the first place. If you’re down on a stock, stock, you already have a
you already have a loss. Holding on doesn’t change that fact. We recommend loss. Holding on doesn’t
cutting losses at a maximum of 7–8% below your purchase price. In many change that fact.
cases, your capital will serve you better allocated to another stock with a
stronger likelihood to advance.

Ignoring Sell Signals

Selling right is as important as buying right. It’s easy to get attached to a stock
that has advanced a lot from your purchase price. You might really like the
company story, and the fundamentals may still look fabulous. If you ignore
signs that a stock is topping, however, you may see your hard-earned gains

Buy Right, Sell Right

evaporate. Remove emotion from the equation. Employ a rule-based system
to help spot a topping stock.

Questions? (800) 831-2525 | [email protected] Page 71

Applying MarketSmith

Page 72
Chapter 4

Develop
a Routine
MarketSmith is designed so that you can complete
your entire research routine on one screen. You no longer need to jump
between windows to conduct your research.

We integrated all of our research products into a single platform to allow you
to quickly find ideas, analyze those ideas, and manage them all in one place.

The following section will describe the steps required to accomplish each
of these three critical tasks during a research routine. We end the section
with a suggested approach to developing a research routine, depending on
your schedule.
Applying MarketSmith

Finding Ideas

Screening

MarketSmith allows you to screen the O’Neil Database® to find stocks and
funds that meet a specific set of criteria. Screening is a powerful way to find
stocks that correspond with your investing style.

If you are new to screening, consider starting with the MarketSmith preset
screens. You can find a list of screens catered to different investing philosophies
within the MarketSmith Stock Screens and MarketSmith Fund Screens folders.

Once you become comfortable with screening, you can customize the
screener to target specific investment ideas. Schedule a session with your
product coach for greater insight into using the screener.

Preset Stock and Fund Screens

MarketSmith offers several
preset stock and mutual fund
screens that are geared toward
a variety of investing styles.

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 Chapter 4: Develop a Routine

Reports

Another resource aimed to help you find ideas is the Reports folder, located in
the List Manager. MarketSmith reports are generated each week from pre-
set screens that are run automatically for you. For example, the Stocks folder
includes the Weekly New High Report, which lists stocks that reached a new
52-week price high during the prior trading week.

The Growth 250 (G250) Report is a premium list of stock ideas that saves you
time in your research process. Designed by O’Neil portfolio managers, the G250
Report is generated using 30 separate stock screens that evaluate different
aspects of growth stocks on a weekly basis. Because of the advanced screening
criteria in the report, the list size fluctuates, acting as an additional indicator for
market direction. If the list is long, the market is likely strong and vice versa. The
Growth 250 Report, in conjunction with the Pattern Recognition algorithm, will
allow you to search for stocks that are currently building a base or have recently
broken out of a base. The Alerts feature will also allow you to set up alerts on any
stocks in the Growth 250 as they break out in “real-time”. (using the BATS real-
time reference data).

Premium Stock Reports

MarketSmith preset stock reports
and premium Growth 250 reports.

Hint
Contact your product coach for a
trial of the Growth 250 add-on.

Develop a Routine

Questions? (800) 831-2525 | [email protected] Page 75

Applying MarketSmith

Analyzing Ideas

MarketSmith Charts

MarketSmith charts enable you to conduct a thorough analysis of a stock

in a short amount of time. It is generally best to start with the weekly chart,
because it gives you the most fundamental and technical data in a single
snapshot, everything you need to make an informed decision. Once you
become comfortable with all of the data points, you will be able to quickly
scan through hundreds of charts, allowing you to stay on top of the market—
and your portfolio.

Interpreting the Weekly Chart

At MarketSmith we encourage the use of weekly charts to make decisions.

We recommend that you start with the price action and interpreting the
chart pattern and buy point. We work our way around the chart clockwise, as
shown below, looking for certain technical and fundamental data points.

Interpreting the Weekly Chart

Clockwise from right:

1. Identify the pattern and

potential pivot, RS Rating, and
RS Line

2. Quarterly EPS and Sales with

emphasis on two most recent
quarters

3. ROE at least 17%? Other stocks

in group? Fund sponsorship
increasing?

4. O’Neil proprietary rankings

3-5 year growth rate at least 25%

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 Chapter 4: Develop a Routine

Managing Ideas

This section covers techniques for watch-list management, including adding

items to lists, removing items from lists, and customizing lists.

Watch lists will help you focus your time and energy and track the progression Watch lists will help
of your ideas. No matter your investing style, having an organized watch list is you focus your time and
crucial to staying organized and on top of the current market. We recommend energy and track the
three watch lists: Universal, Ready-to-Go, and Portfolio. progression of your ideas.

Universal

The Universal watch list is designed to capture all the ideas you may find
attractive. These ideas may be weeks away from breaking out, but you want
to be sure they don’t fall off your radar. Fundamental screens work best to find
great stocks to put on your Universal watch list. Review it weekly to maintain a
good selection of stocks to watch.

Ready-to-Go

When stocks are completing chart patterns and nearing buy points, move
these ideas from your Universal list into your Ready-To-Go list, which basi-
cally queues up stocks you may enter in the near future. This list will be much
smaller and more focused than the Universal list and should be reviewed daily.

Portfolio

The third list tracks your Portfolio holdings. This list should be reviewed daily
to evaluate the performance of stocks you own.
Develop a Routine

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Applying MarketSmith

Routine

Structuring a consistent A routine enables you to keep up with the market and your positions in a man-
routine in MarketSmith ageable amount of time. For most investors, managing their portfolio is not
helps you stay on top their full-time job, so structuring a consistent routine in MarketSmith helps
of your portfolio and you stay on top of your portfolio and potential leading stocks, without having
potential leading stocks, to monitor the market every day.
without having to monitor
the market every day.
Why is a routine important?

With a consistent routine, you will reach better results. For example, doing
research and creating a “gameplan” over the weekend not only minimizes the
work required during the week, but also allows you to think clearly and objec-
tively, without any emotional reactions to market action. During the weekdays,
monitor your “gameplan,” taking advantage of the preparation you put in over
the weekend. By not drifting too far from the market, you will always be able
to stay in touch and develop an awareness of the signals that indicate a shift in
market trend.

A successful research routine will include:

• Generating stock investment ideas

• Analyzing those stock ideas

• Building watch lists to stay organized

Page 78
 Chapter 4: Develop a Routine

Weekend Routine Checklist

3 Review Reports folder (e.g., Growth 250, New High report)
3 Run your favorite weekend screens
3 Add, subtract, or shift stocks, as needed, from your Universal watch list
3 Build your Ready-to-Go list for the upcoming week
3 Interpret general market indices for signs of strength or weakness
3 Review top 40 industry groups, plus any groups that are moving up quickly in rank

Weekday Routine Checklist

3 Update and review your Ready-to-Go list for any changes
3 Run any of your weekday screens (e.g., Stocks Up on Volume)
3 Add or subtract from your Portfolio list, based on weekly market action as needed
3 Print out daily/weekly charts of any new purchases/sales

A Sustainable Research Routine for the Busy Life

For this webinar and others, please visit:
marketsmith.com/learn/webinars.aspx

Develop a Routine

Questions? (800) 831-2525 | [email protected] Page 79

Applying MarketSmith

Page 80
Chapter 5

Evaluate
Sponsorship
& Industry
Groups
Institutional Sponsorship and Industry Groups are
two more important parts of the stock analysis process. Institutional buying
and selling is what precipitates stock activity, and institutions are always look-
ing for the fastest-growing industries.

By analyzing which funds are buying a stock and what industry groups are in
favor with Wall Street, you will be able to narrow your stock selections even
further, improving your odds for success in the stock market.
Applying MarketSmith

Sponsorship

MarketSmith also offers access to an extensive mutual fund database of

nearly 9,000 funds. You can screen this database for fund performance,
access specific holdings within funds (as of the most recent quarterly report),
and use the database to determine institutional sponsorship.

Gauging institutional sponsorship is a key step in our analysis of individual

stocks. As discussed previously, it takes big demand to move a stock’s price
higher, and that demand comes from institutional investors like mutual funds
and hedge funds. Not only are we looking for an increasing number of funds
owning our stock of interest, we also want to verify that some of the best-
performing fund managers own it.

Start by developing a list of your top 20-25 mutual funds and flag each of them in
the list panel. You can hand-pick funds with impressive performance or use the
components of the IBD Mutual Fund Index (MarketSmith symbol 0MUTI), which
is a curated list of the best growth funds according to MarketSmith founder
William J. O’Neil. Once flagged, the flag icon will appear anytime these funds are
in a list, or being charted. This makes it easy to see how many of your top funds
have a position in a stock you are researching.

Sponsorship
View a list of fund owners for a Sponsorship list for KORS
particular stock in MarketSmith. June 9, 2012

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 Chapter 5: Evaluate Sponsorship & Industry Groups

For example, in evaluating Michael Kors (KORS) on the previous page, there
are 136 funds that have a position in KORS as of that time. By clicking on the
Show Fund Ownership button in the Related Information Panel, you can see
the names of all 136 funds. If you sort this list by the “flag” column, any of the
“top funds” you flagged will rise to the top of the list. In this example, there
are six funds previously identified as “top funds” that have a position in KORS.
This should give you added conviction that you are on the right track.

The percent of shares held and the percent of fund assets gives you a basic
idea of whether a fund is accumulating a new position. For example, if a large
mutual fund has a position in KORS at 0.03% of all assets, that is not a signifi-
cant position. Even a tenfold increase in KORS’s price would not affect the fund’s
performance. Watching to see if the KORS position increases as a percent of the
fund’s assets is a good way to confirm institutional accumulation, which would
be an important factor in KORS’s potential price appreciation.

Using Institutional Ownership in Stock Selection

For this webinar and others, please visit:
marketsmith.com/learn/webinars.aspx
Evaluate Sponsorship
& Industry Groups

Questions? (800) 831-2525 | [email protected] Page 83

Applying MarketSmith

Industry Groups

Knowing how to spot industry group trends and knowing which specific groups
are leading the cycle is vital to your stock selection. In every bull market, certain
areas of the economy experience tremendous growth, and as a result, attract
a lot of attention from Wall Street. Keep in mind, the industry that leads in one
bull market will often be different from the one leading the next bull market.

Studies have shown Studies have shown that roughly one-third of a stock’s move can be related
that roughly one-third to its industry group. It is critical to identify which industries have the most
of a stock’s move potential to benefit in the next bull market. MarketSmith allows you to track
can be related to its these trends very easily. For example, let’s analyze the Restaurants group
industry group. starting in March of 2010 using the Change Date feature.

While most stocks in a strong industry group will perform well, the leading
stock will vastly outperform the others. See Chipotle’s (CMG) move within the
Retail-Restaurants Group during the above-mentioned time frame.

Industry group analysis

Use industry group charts Retail-Restaurants Group vs Chipotle, March through December 2010
to find groups that are
outperforming the market.

Retail-Restaurants Group (G5812) Chipotle (CMG)

Page 84
 Chapter 5: Evaluate Sponsorship & Industry Groups

It is generally best to concentrate on stocks that are in the top 40 Industry

Groups. This can improve your odds for success in a good market. The overall
goal should be to identify the leading stock in a strongly performing industry
group and take a position in it.

“Because specific industry groups lead each market cycle, you

can see how worthwhile it is to consider a stock’s industry before
making a purchase.”
— William J. O’Neil, How to Make Money in Stocks

Using Industry Group Rotation to Gauge Leadership

and Market Health
For this webinar and others, please visit:
marketsmith.com/learn/webinars.aspx
Evaluate Sponsorship
& Industry Groups

Questions? (800) 831-2525 | [email protected] Page 85

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