The Growth Stock Report applies a combination of fundamental and technical analysis that has been the strategy of many leading hedge funds and institutional money managers. Each update of the report gives a list of potential buy and sell candidates screened to meet strict criteria. The following is a simple outline of the strategy, please feel free to ask us if you have any questions:

Before we go further, let's set our definitions straight:

Fundamental Analysis - This component of the strategy gets into the guts of the market and individual stocks. Earnings, revenue, return on equity (ROE), business models, economic trends, and news, make up this portion of the analysis.

Technical Analysis - Stocks that meet our fundamental criteria are then examined from a technical perspective. Technical analysis examines the price history of a stock, then projects a future trend. Solid growth stocks have a history of repeating the same patterns over and over again. Most common to these patterns are what are known as 'bases'. From these bases we are able to identify precise entry and exit points. Here are some of the patterns we look for:

For a complete description of our patterns and rules please refer to our Pattern Rules section.

The Top-Down Approach

Our market analysis follows a top-down approach. Before even thinking about buying or selling a stock we need to have a good grip on how the overall market is behaving. To achieve this we look at the following:

Market Leadership - Market strength is often best measured by the characteristics of its leadership. This is where we look for trends in new highs and lows, and gain a feel for the types of stocks driving the overall market. Healthy intermediate-term rallies are often led by technology, and in particular, the semiconductors. These sectors are usually the focus of aggressive money, which act as bellwethers for the overall market. We track market leaders through our Leaders section, where we also monitor New 52-Week Highs and Lows.

Volume Patterns - Who is buying and selling? We always look to be on the side of the institutional players. Accumulation indicates institutional buying, and Distribution indicates institutional selling. This is all analyzed through volume patterns which we track on our Accumulation/Distribution indicator, as well as the Volume Breadth history found on our Indicators page.

Economic Trends - It is not our goal to correctly predict economic trends. This is something economists as a group are notorious for failing at. Rather, our task is to gauge how the market is reacting to key news. From the trader's perspective it's not so much the news that's important, as the reaction to the news. Strong markets have the ability to shrug bad news, and weak markets tend to sell on good news.

Market Sentiment - Crowd psychology is a crucial component of market dynamics. History has proven to us over and over that the majority of the people in the markets will get it wrong. As the Gordon Gekko character in the movie Wall Street correctly identified, "sheep get slaughtered". Markets tend to turn when fear and greed are at their highest. To monitor sentiment, The Growth Stock Report uses the contrarian indicators of Investors Intelligence, Put / Call Ratios, and VIX readings found on our indicators page.

With an overall market bias in place, our analysis then focuses on the industry groups. Here we look for upside and downside leadership.

Strongest and Weakest Industry Groups - Monitored on our Leaders page, this gives an indication of where the money is flowing into or out of. Just like fashion styles, the market goes through changes. It is our intention to always be hip to the current trends. If the market supports Internet companies, we're going to look for opportunities there. Conversely, if it is apparent that institutions are staging an exodus from the healthcare sector, we're going to be in tune with selling opportunities there.

To track leadership we follow a system that ranks the industry groups from 1 to 214. We're mostly interested in the the top 20 groups for our trade selections.

Selecting Individual Stocks

Selecting individual stocks to trade is the final step of our analysis. Our universe of stocks consists of over 7,000 selections from the NYSE, Nasdaq, and AMEX exchanges. We screen these stocks for fundamental and technical properties to meet the criteria for one of the following groups:

Classic Intermediate-Term Candidates - These setups represent stocks with everything going for them. Though at times few and far between, these selections are well worth waiting for.

Aggressive Intermediate-Term Candidates - Stocks that don't quite match our ideal criteria, though still possess attractive qualities, will be found on this list. These trades offer opportunities for the more active and nimble.

Short Candidates - This category is considered extremely aggressive, and if traded, must be done so with extreme caution. Short candidates are selected in the opposite fashion of long candidates, and are graded upon weakness in fundamental and technical criteria.

Selections for the categories are based on the following criteria:

Fundamentals:

Earnings - Stocks with quarter-over-quarter earnings of at least 30% are preferred for buys.

Revenue - Stocks with quarter-over-quarter revenue of at least 25% are preferred for buys.

Return on Equity (ROE) - The ideal ROE is at least 17% for buys.

Relative Strength (RS) - We prefer stocks in the top 15 percentile of the market in terms of performance for buys, which equates to a Relative Strength (RS) value of 85 or higher. We also prefer buy candidates to be a top five industry group.

Business Model - Companies that have the quality of something 'new' or 'unique' are sought after candidates. The company should also be a market leader in its field.

Institutional Sponsorship - We always look to be on the side of the 'big boys', and look for candidates that have attracted the interest of quality institutional money managers. This is identified through volume analysis in the form of Accumulation and Distribution.

Market Support for Similar Stocks - Stocks tend to perform better when confirmed by the success a similar stock in its industry group.

Technicals:

Price and Volume - These are the primary components used for our technical analysis. While more subjective than fundamental analysis, our experience has taught us exactly what to look for when in comes to identifying high probability setups. This gives us a distinct edge.

For more information on technical patterns, please refer to our Pattern Rules

Trading Requirements :

Price Minimum - Ideal stocks have a minimum price of $15. For more aggressive selections we will search below $15.

Average Volume Minimum - Stocks should average at least 100,000 shares a day for the past 50 trading days.

Market Capital - A market cap of $200,000,000 is the preferred minimum.

Market Indicators :

The Growth Stock Report uses price and volume as its primary tools of analysis, and various other methods as secondary indicators.

Keep Your Losses To A Minimum!

Perhaps the most important component of our intermediate-term strategy is setting a predefined stop-loss. The maximum for losses on each trade is set at 8%, and in many cases lower!

The above outline is just a simple template of our methods. Our Recommended Reading page offers a selection of top-notch books for mastering the intermediate-term trading strategy.