William O’Neil Offers Six Market Signals to Look For Before Investing in 2012

It has sort of been an “IBD” kind of day around here … in this post the founder of Investor’s Business Daily (and “godfather” of CANSLIM) William O’Neil takes to Forbes to discuss the 6 Market Signals he wants to see before going “all in bull” in 2012. I am not as focused on ‘the big bang’ market signal as the CANSLIM devotees – I tend to take my signals from the action of the individual stocks…. when a good lot of them begin acting healthy (outside of defensive sectors) my radar starts perking up. Devout CANSLIMers on the other hand look for a Follow Through Day (FTD) as explained:

….a day where a major index is up at least 1.7% in price with higher volume than the previous day. A great example is the NASDAQ FTD on October 18, 1990. Typically this occurs 4-7 days after a new rally begins and significantly increases the chances of a sustainable uptrend. No bull market has ever started without one.

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Here are Mr. O’Neil’s thoughts:

Don’t get me wrong, I’d love to have a good market to operate in. But before investing aggressively on the long side in 2012, investors should be looking for the environment to prove itself in the following ways:

• A FTD, as described above, accompanied by leading stocks breaking out from sound consolidation areas (recognizable chart patterns).
• Because the market environment has been so poor, I’d like to see a second FTD. Given the lack of conviction seen in individual stock breakouts and weak rally attempts lately, the next market rally needs to prove itself, in a big way.
• I’d like to see at least one real catalyst. None of the major economic or political issues weighing on the market have been resolved.
• I’d also like to see more new issues in the IPO market. (splashy IPOs such as Zynga and LinkedIn aren’t enough)
• New leadership should be emerging in traditional growth industry groups (such as, financial, technology, retail).
• Fewer short setups on leading growth stocks and more constructive long chart patterns.

Keep in mind these are not predictions, but rather expectations that may or may not be met. Until they are, keep your powder dry and your watch list fresh. Our day will come.