Becoming Market Smith

Becoming a
MarketSmith
YOUR GUIDE TO CONDUCTING STOCK RESEARCH
AND APPLYING IT TO YOUR PORTFOLIO
Forward
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!
W. Scott O’Neil
1
Copyright © 2017 Investor’s Business Daily, Inc., Investor’s Business Daily, IBD, CAN SLIM, and corresponding logos are registered trademarks
owned by Investor’s Business Daily, Inc. MarketSmith is a registered trademark of MarketSmith, Incorporated.
The material contained herein is not to be reproduced, redistributed, published, stored in a retrieval system, or transmitted in any form or by any
means, electronic mechanical, photocopying, recording, or otherwise, without prior written permission of Investor’s Business Daily, Inc.
and MarketSmith Incorporated.
Data provided under license agreement by William O’Neil + Co. Incorporated. All material presented here has been obtained or derived from
sources believed to be accurate, but Investor’s Business Daily, Inc., MarketSmith Inc., and William O’Neil + Company, Inc. do not guarantee
its accuracy and it may possibly be incomplete and/or condensed. The contents are based on the study and interpretation of available data as it
relates to our historical models of the best performing stocks. This is not a prospectus; no effort on our part with respect to sale or purchase of
any securities is intended or implied. Any chart appearing in this material is for educational purposes and is not, and should not be construed as a
recommendation or rating to buy or sell any security. It is possible that at this date or some subsequent date the officers, directors and/or
shareholders of William O’Neil + Company, Inc., MarketSmith Inc. and Investor’s Business Daily, Inc. and their affiliates own securities or buy or sell
securities listed in the following pages or those not mentioned.
TABLE OF CONTENTS
Using MarketSmith
Getting Started Page
Signing In 6
Charts
Charts Overview 7
BATS — Real Time Reference Data 8
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
Stock & Fund Screener
Screens, Alerts, and Notes 19

Screener Overview 20
Customizing the Screener 21
Preset and Shared Screens 22
Index of Screenable Criteria 23
CONTINUED >
3
Support Resources Page
MarketSmith Tutorial 24
Help Menu 27
Education and Support 28
Applying MarketSmith
Identify Winning Stocks 33
Time the Market 49
Buy Right, Sell Right 57
Develop a Routine 69
Evaluate Sponsorship
& Industry Groups 77
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.
4
Using
MarketSmith
Getting Started
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 recent community overviews.
Sign in at marketsmith.com
6
Charts
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, Use Tool Help to get more
and intraday charts. details on stock chart features.
Change the chart date to view Click the Alerts icon to

Enter the symbol here. historical charts dating back to 1962. manage, view, and set alerts.
   

50-Day Moving Average



200-Day Moving Average
Relative Strength Line
Insider Buy/Sell Transactions


Fundamental Data
Questions? (800) 452-4422 | reachus@marketsmith.com 7

Charts
BATS—Real Time Reference Data

BATS is a leading global operator of exchanges and services for financial markets around the globe, committed
to making markets better for traders, investors and issuers. The BATS data is provided for free as part of your
MarketSmith subscription.
BATS data indicator Enable BATS Real-Time data here
 
8
Charts
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

Buy Zone
 
Loss-Cutting Zone

Charts
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
10
Charts
Chart Legend
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.
Hover over any feature. Feature description appears here.

Charts
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.
12
List Panel
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.

 



The lists are categorized by folder. Play a stock or fund list as a slideshow.
Find pre-set lists under Reports and Control the interval speed from the
Markets/197 Industry Groups. pull‑down menu ( ) to the right.
Double-click on any stock to pull up

the chart view.
Use List Panel Tools to customize
column headings, print, and export lists.
The List Panel features column headings
which can be expanded or contracted.
Drag and drop columns to reorganize.
Use List Panel Help to get information
about List Panel features.

List Panel
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

by dragging and dropping symbols
from reports and screen results, or
typing symbols directly into the cell.
14
List Panel
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.
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 list by
the changes to your current list. that category.

List Panel
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, Industry Groups, Report contents are displayed to the right.
Mutual Funds, or Options sub folders. Click on any list item to launch its chart.
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.
16
List Panel
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
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.

List Panel
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”.
Access G250 - Pattern Recognition reports
18
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.
Click the Blogs tab to read what others

in the MarketSmith community are
saying about a stock, or share your
own observations.
The notes feature allows you to

annotate your analysis.
Use Tool Help to get more details about

the Screens, Alerts & Notes panel.



Use annotations and advanced Click this tab to hide or expand the
mark-up tools to keep track of your Screens, Alerts & Notes panel.
notes and mark-up the charts to your
specifications.

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 market
or create complex filters that can be used to spot potential investment candidates.
Click on New to create a stock or fund

screen. Set the criteria for your screen.


Use MarketSmith Preset screens to get View screen results in the List Panel.
started. Results appear dynamically as you
modify criteria.
20
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
choose which items you wish to include in your screen.
Set your screen parameters here.


Select from over 100 criteria here.

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.
In the Screener, click Browse Screens

to access screens created by other
MarketSmith members.
Click MARKETSMITH Screens to

browse Stock Guide screens created
by MarketSmith education coaches.
Tracked screens will be added to your

list of screens.
When you find something useful or
interesting select Track Screen.
22
Index of Screenable Criteria

SmartSelect Ratings (6) Accelerating Over the Average Sales % Change Current 50-Day Average ROE (Latest Fiscal Year
Earnings Per Share (EPS) Latest 3 Quarters (%) for Last 3 Quarters Daily $ Volume (1000s) Reported)
Rating * Annual EPS % Growth Average Sales % Change Current Price % Above ROE, 5-Yr Average
Relative Price Strength Rate of Last 1 Year for Last 4 Quarters or Below 50-Day Moving Debt % (Latest Fiscal Year
(RS) Rating * Annual % EPS Growth Average Sales % Change Average Price Reported)
Industry Group Relative Rate of Last 3 Years for Last 5 Quarters Current Price % Above or Estimated P/E Going Out
Strength (Grp RS) Rating Annual % EPS Growth Average Sales % Change Below 200-Day Moving 1 Year
Sales +Profit Margins+ Rate of Last 5 Years for Last 6 Quarters Average Price Current Trailing 12 Month
ROE (SMR) Rating Annual % EPS Growth % Price is Up in the P/E
Industry & Sector (3) Current Week
Accumulation/ Rate of Last 5 Years P/E vs. Current S&P 500
Percent Rank Company’s Industry % Price is Up in the Latest
Distribution (Acc/Dis) P/E
Group Rank 1 Month
Rating * Earnings Stability P/E Percent Rank
Industry Group Name % Price is Up in the Latest
SmartSelect Composite Average EPS % Change for P/E Number Rank in
Rating Last 2 Quarters Broad Sectors 3 Months Group
Average EPS % Change for Shares & Holdings (9) % Price is Up in the Latest P/E Less Than 5- Year
Earnings (36) 6 Months
Last 3 Quarters Shares Outstanding Average
EPS Due Date % Price is Up in the Latest
Average EPS % Change for (1000’s) P/E to Earnings Growth
% Change in Latest Last 4 Quarters 12 Months
Market Capitalization Rate (PEG)
Quarter vs. Same Quarter % Price is Up for Year to
Average EPS % Change for (mil) P/E to Earnings Growth
Prior Year (-/+) * Date
Last 5 Quarters Enterprise Value (mil) Rate Plus Dividend Yield
% Change in 1 Quarter Current Alpha
Average EPS % Change for Sponsorship Rating (Dividend-Adjusted PEG)
Ago EPS vs. Same Quarter
Last 6 Quarters Current Beta Current Price to Sales
Prior Year % of Stock Owned by
Latest Quarter % Earnings Mutual Funds Average True Range (30 Ratio
% Change in 2 Quarters
Surprise Days) Current Price to Book
Ago vs. Same Quarter % of the Number of
Prior Year EPS Trailing 4 Qtrs Greater Mutual Funds Owning Value
Margin & Ratios (31)
Than EPS, 4 Yrs Ago for Current Quarter vs. Current Price to Cash Flow
% Change in 3 Quarters After Tax Profit Margin
Ago vs. Same Quarter EPS, Lst Fiscal Yr Greater Previous Quarter Current Enterprise Value
(Most Recent Reported
Prior Year Than EPS, 4 Yrs Ago Sponsorship, Mutual to Free Cash Flow
Quarter)
EPS, Trialing 4 Qtrs EPS, Trailing 4 Qtrs Funds Holding Position, Current Ratio
Average After Tax Profit
Greater Than or Equal to Last Reptd Qtr * Current Yield %
EPS, Fiscal Year- Last Margin (Last 2 Quarters)
EPS, Lst Fiscal Yr % of Stock Held by
Reptd Yr Average After Tax Profit Long-Term Debt to
EPS % Change Current Management Working Capital Ratio
EPS, Fiscal Year- 1 Yr Ago Margin (Last 3 Quarters)
Quarter Greater Than 3-Yr % of Float Held by
EPS, Fiscal Year- 2 Yrs Ago Average After Tax Profit Total Liabilities/Total
EPS Growth Institutions Less Than
EPS, Fiscal Year- 3 Yrs Ago Margin (Last 4 Quarters) Assets Ratio Less Than
EPS % Change Current Database Median Industry Median
EPS, Fiscal Year- 4 Yrs Ago Quarter Greater Than or Average After Tax Profit
EPS, Fiscal Year- 5 Yrs Ago Equal to 5-Yr EPS Growth Price & Volume (26) Margin (Last 5 Quarters) General Stock Criteria
EPS, Fiscal Year- 6 Yrs Ago Current Price * Average After Tax Profit (12)
Sales (12) Margin (Last 6 Quarters)
% Change in Fiscal Year Current Price in Relation to Exchange
Current Total Annual Sales 52-Week High * Companies With
EPS vs. Prior Year, Last ADR
(mil) Accelerating After Tax
Reptd Yr Price % Change ETF/Closed-End Fund
% Change Latest Quarter’s Profit Margins During
% Change in Fiscal Year Price $ Chg ETF
Sales vs. Same Quarter Latest 3 Quarters (%)
EPS vs. Prior Year, 1 Yr Ago RS Line Making New High Stock has Options
Prior Year * Pre-Tax Annual Margins
% Increase in Next RS Line Making New Low IPO Date
% Change in Latest Fiscal (Latest Fiscal Year
Quarter’s EPS Estimate Relative Strength, 3 Month
Year Sales vs. Prior Year Reported) Date of Incorporation
from Same Quarter Prior
Sales Have Been Relative Strength, 6 Month Operating Margin Greater Company Headquarters -
Year Actual EPS
Accelerating Over the Timeliness Rating Than or Equal to Industry City (US and Canada only)
% Increase in Current
Latest 2 Quarters (%) Price, % Change vs. S&P Median or Country
Annual EPS Estimate vs.
Last Reported Annual EPS Sales Have Been 500, 26 Weeks Profit Margin Greater Company Description
Accelerating Over the Volume Intraday (1000s) Than or Equal to Industry Headquarters - State or
% Increase in Next Year’s
Latest 3 Quarters (%) Current 50-Day Average Median Province
Annual EPS Estimate
vs. Current Annual EPS Annual % Sales Growth Volume (1000s) * Cash Flow vs. EPS % New CEO in Latest 12
Estimate Rate of Last 3 Years % Increase in Current Difference- Last Reported Months
Annual % Sales Growth Day’s Volume vs. 50 Day Quarter Company Was Featured in
Sustainable Growth Model
Projected EPS Growth % Rate of Last 5 Years Average Volume Cash Flow vs. EPS % an IBD Article During Last
Average Sales % Change Up/Down Volume Ratio Difference- Last Reported 2 Years
EPS Have Been
for Last 2 Quarters Year

Support Resources
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 any
of the screen. time.
To contact a product coach, click on

the orange Contact My Coach button.
24
Support Resources
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


For more details on each feature, click

here to view a help map of the feature.

Support Resources
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.
26
Support Resources
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

List Manager 
Click a highlighted area for detailed

feature descriptions.

Support Resources
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 Learn and Support sections on our website. Each area provides
important information to make you a MarketSmith.
Learn feature use and navigation with
Learn all about MarketSmith from the detailed the Video Tutorials.
instructions provided for each feature.

View exclusive educational webinars.
Use the SUPPORT section to answer general

investing questions and solve technical issues.
28
Applying
MarketSmith
Chapter 1
Identify
Winning
Stocks
32
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 leaders 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 platform'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.
33
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.
34
Fundamental Data
Key Ratings: Fundamental data on daily and
weekly charts allow you to quickly
EPS Rating: This stock's earnings data is evaluate a stock's potential.
outperforming 99% of all stocks in our database.
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
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.

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 exhibited outstanding Netflix (NFLX),
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's earnings and sales Apple (AAPL)
December 2003
skyrocketed after the launch of the
iPod music player in 2001.
36
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

Customizable Stock Checklists
Stock Checklist
help you quickly analyze
individual stocks.
What to Buy? Don't Overlook Fundamental Stock Analysis

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

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.
38
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.
Greatest Winners: Use the change date feature in MarketSmith

to review these stocks on dates displayed for classic examples of
recognizable chart patterns.
NFLX: 8/10/2010 AAPL: 3/4/2004 CMG: 9/1/2010
PCLN: 1/5/2011 XRX: 4/5/1965 GOOG: 4/22/2005
BIDU: 5/14/2007 SCHW: 10/15/1998 AMGN: 11/12/1990
The Importance of Chart Patterns


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
Double Bottom Base

weeks
• Base Correction: < 50% from
peak
• Pivot Point: Breakout through
middle of W
40
Flat Base
weeks
• Base Correction: < 15%
• Pivot Point: Left-side high of base
IPO Base
• Base Length: 2 to 4 weeks
• Base Depth: 0% to 20%
• Pivot Point: Left-side high of
base
Consolidation
• An area of resistance that fails
to form a more defined base

Cup Base
• Base Length: Minimum of 7 weeks
• Base Depth: 20%-30%
• Pivot Point: Left-side high
of base
Ascending Base
• 3 pullbacks from 10% to 20%, with
each low-point during the selloff being
higher than the preceding one
42
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

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

Term: Supply
The amount of a particular Why Follow Institutional Investors?
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
exceeds demand, prices fall. Each trading day, the majority of market volume is coming from the institu-
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
Term: Demand
The amount of a particular item price of a stock.
that is desired for purchase in
a market. In the stock market, Keep in mind that stocks represent fractional ownership in a company. You
it refers to how many shares don’t own the company, you own the stock. And that stock price can reflect or
are currently being bought by diverge from how strong the company is in your opinion. Analyzing a chart to
investors. When demand exceeds
supply, prices rise. measure the supply of a stock vs. demand for it, will help to keep your opinion
or emotional connection to the stock out of the equation.
Track Price Tool

To access the Track Price tool Track Price Tool
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

44
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
ing volume, MarketSmith calculates the trailing 50 days of average trading to three times greater
volume for each stock. Ideally, on days your stock is up, its volume will be up, than normal on their
and on down days we prefer to see lighter trading volume. On a key day, like a breakout day.
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.

Breakout Days
The day when a stock moves Breakout Days
up in price through the
pivot price (buy point).
Chipotle Mexican Grill (CMG) Google (GOOG)
September 2010 April 2005
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
46
Chapter 2
Time the
Market
48
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.
49
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.
50
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.

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

52
“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
Market Bottom, Nasdaq Composite Mark rally Follow-Through
March 17, 2003 days on your charts to
signal a new uptrend.

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
54
Most stocks follow the market

Market Top: March 10, 2000 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)

Chapter 3
Buy Right,
Sell Right
56
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.
57
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.
58
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
Pattern Recognition as your
guide to determine whether
the stock is extended.

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

60
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
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.

OpenTable (OPEN)
OpenTable broke through OpenTable (OPEN)
the 50-day moving average September 2011
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:
62
Lock in Your Gains

Take profits when the stock
Herbalife (HLF)
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%
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.

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.
64
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
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.

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.
66
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
evaporate. Remove emotion from the equation. Employ a rule-based system
to help spot a topping stock.

Chapter 4
Develop
a Routine
68
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.
69
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.
70
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.

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%
72
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.

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
74
Weekend Routine Checklist Weekday Routine Checklist

33Review Reports folder (e.g., 33Update and review your
Growth 250, New High report) Ready-to-Go list for any
33Run your favorite weekend changes
screens 33Run any of your weekday
33Add, subtract, or shift stocks, screens (e.g., Stocks Up on
as needed, from your Universal Volume)
watch list 33Add or subtract from your
33Build your Ready-to-Go list for Portfolio list, based on weekly
the upcoming week market action as needed
33Interpret general market 33Print out daily/weekly charts

indices for signs of strength or of any new purchases/sales
weakness
33Review top 40 industry
groups, plus any groups that
are moving up quickly in rank
A Sustainable Research Routine for the Busy Life


Chapter 5
Evaluate
Sponsorship
& Industry
Groups
76
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.
77
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
78
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


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
to find groups that are Retail-Restaurants Group vs Chipotle, March through December 2010
outperforming the market.
Retail-Restaurants Group (G5812) Chipotle (CMG)
80
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

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Getting Started Page

List Panel Overview 13

Stock & Fund Screener

Screens, Alerts, and Notes 19

Identify Winning Stocks 33

Time the Market 49

Buy Right, Sell Right 57

further illustrate market concepts and terms.

Change the chart date to view Click the Alerts icon to

Insider Buy/Sell Transactions

Questions? (800) 452-4422 | reachus@marketsmith.com 7

BATS—Real Time Reference Data

BATS data indicator Enable BATS Real-Time data here

Pattern Recognition button

Questions? (800) 452-4422 | reachus@marketsmith.com 9

Triggered Alerts indicator

Hover over any feature. Feature description appears here.

Questions? (800) 452-4422 | reachus@marketsmith.com 11

Related Information Panel

Move between buttons for in-depth

Click the Related Information tab to

View all stocks in Industry

List Panel Overview

Double-click on any stock to pull up

Questions? (800) 452-4422 | reachus@marketsmith.com 13

Click New > List to create and name a

New stocks can be added to your list

Customizing Your View

Customize the layout of your list

Select a category, then click and drag

the specific criterion to the column

Questions? (800) 452-4422 | reachus@marketsmith.com 15

The O’Neil Proprietary 197 Industry

MarketSmith Growth 250 Report

Click for MarketSmith Growth 250 report.

Questions? (800) 452-4422 | reachus@marketsmith.com 17

MarketSmith Growth 250 Report and Pattern Recognition

Access G250 - Pattern Recognition reports

Screens, Alerts, and Notes

Click the Blogs tab to read what others

The notes feature allows you to

Use Tool Help to get more details about

Questions? (800) 452-4422 | reachus@marketsmith.com 19

Click on New to create a stock or fund

Customizing the Screener

Set your screen parameters here.

Select from over 100 criteria here.

Questions? (800) 452-4422 | reachus@marketsmith.com 21

Preset and Shared Screens

In the Screener, click Browse Screens

Click MARKETSMITH Screens to

Tracked screens will be added to your

Index of Screenable Criteria

Questions? (800) 452-4422 | reachus@marketsmith.com 23

To contact a product coach, click on

1. Stock Chart 3. List Panel

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

Maximize the Screens, Alerts & Notes