I published my latest newsletter today that provided a summary of the CAN SLIM methodology, how to determine the type of market environment we're in, and how to invest in each. This empirical methodology was developed by the legendary Bill O'Neil based on market behavior dating back to the 1880s.

I personally know PMs at the O'Neil family office and saw firsthand how they avoided the majority of the March 2020 drawdown and got back in near the lows. It has proven effective to avoid similar major corrections like the dot-com bubble, GFC (example in the newsletter), and 2018 taper-tantrum.

While I won't copy and paste the entire article, here are some of the highlights:

Since we are already in a correction, I will start with how to determine with a high probability that the market is going into a correction.

Distribution Days: Distribution days occur when Nasdaq or S&P 500 are down more than 0.20% (this figure varies slightly) on higher volume than the prior day. These days are significant because they are a sign of institutional selling. While institutional buying is known as accumulation, institutional selling is known as distribution. The question is then how to use distribution days to determine market direction? There are three components of this trend analysis: 1) the number of distribution days, 2) the cadence/speed/frequency of distribution days, 3) the intensity of distribution days. What this means is that a build-up of distribution days on an index in a short amount of time often indicates a change from an uptrend to correction. To be specific, usually, 5 - 7 distribution days within a 4 - 5 week (20-25 trading day) period will mark this change in trend.

While the accumulation of distribution days indicates when a market changes direction from an uptrend to a correction, follow-through days indicate a change in market direction to the upside.

Follow-Through Day (FTD): A FTD indicates a market correction has ended and a new uptrend has possibly begun. The follow-through day occurs after the major indexes have been trying to rally higher from a recent bottom. A follow-through is an up day in the market of at least 1.25% (this figure varies slightly) on rising volume which usually occurs on the 4th to 7th day of an attempted rally. Note - the FTD must occur on the fourth day after a market bottom or later. If the market undercuts a prior low, the day count resets. A FTD confirms the rally is working and the market trend is changing back to the upside. A follow-through day is an indication for investors that it is time to slowly start increasing exposure by buying strong fundamental stocks that are breaking out of constructive bases.

It is important to understand that a follow-through day has to occur at least four days after a market low during a market in a correction. I keep speaking about probabilities, so the question you should be asking is, "what is the probability that a follow-through day represents a change in the market's direction back to an uptrend?" It turns out that ~70-75% of follow-through days are successful - meaning they indicate the market is resuming an uptrend. This is why I said investors should slowly start buying stocks and getting back into the market, in case the FTD fails and the market reverts into a correction.