Q&A with Gil

Q: When you are monitoring your positions (in eSignal or TradeStation or whatever platform you use) how do you set up your watch lists? Do you have one list with all the setups you are watching and another list that is narrowed down to your best? What is the best way to monitor stocks pulling back to a 20-day or 50-day moving average? Sometimes during the day, I have my head on a swivel and can't see everything, only to review charts at night and see I missed a great pullback.

G: I have five columns on the right side of my screen with all the names on my watch list, symbols A-D, F-M,N-O,R-S, and T-Z, all sorted in real-time by percentage up move for the day. This way I can see immediately what is moving. On the left side I have three separate columns, two columns that show my holdings in each of my portfolios - one concentrated, the other diversified, and one for the stocks on my watch list that I am very, very interested in for that particular day. That last one I update every evening after going through my screens - you can call that my daily "hit list." In terms of monitors, I only use one monitor for quotes, one monitor with my trading platform and online Daily Graphs equivalent, and one monitor for news and other extraneous stuff. I am not a big fan of the big multi-screen set-up as I have not figured out how one human being can constantly swivel around to take it all in at once or in any meaningful way. I let my systems tell me what's going on by keeping everything compact and using alerts. All day long I am also scrolling through my watch list on my online Daily Graphs equivalent which is connected to my eSignal so that I can see price moves and volume intra-day on the Daily Graphs equivalent charts. I try to keep it as simple as possible.

Q: How long is your average trade? Do you trade mutual funds, stocks, or ETF's? Do you need to put trades in during market hours or can you trade the night before the market opens?

G: Average trade can be from a few days to a few months. Essentially we're trying to distill down to the primary market leadership in any rally or bull phase. We only make recommendations on stocks or ETFs that are fairly liquid. Mostly stocks, however. I generally put my trades in during market hours, but as an individual investor you could put in stop orders on whatever system you are using the night before if that works better for you.

Q: I am new to your newsletter and am gaining an appreciation of the different methods you use to enter a position. Currently, I run IBD's screen wizard daily to identify volume breakouts on high quality stocks. Many times the breakouts go beyond 5% above the pivot as recommended by IBD. My method for entering has been to use [a] limit buy [order] at just below this 5% price. My problem is these positions seem to hit the 7% stop at a high rate (with many turning tail and heading back north). Can you recommend a better way to buy into these breakouts? I only need 3-4 stocks to be fully invested so I don't mind missing a few opportunities.

G: What you describe is a very common problem for investors who buy at around 5% beyond the proper buy point or just under that - a lot of breakouts come right back in, looking as if they are going to fail and then turn right back around. What I would suggest is buying a smaller position if you are buying closer to 5% above the pivot point. Then, establish a plan whereby you would finish the position out if the stock pulls back, using 2-3% below the actual pivot point as your stop. Also, The Gilmo Report often shows stocks that we believe are setting up, so this might help you indentify situations sooner and enable you to establish a small position a little sooner

I believe that the whole buy-the-breakout concept has become over-popularized and hence too obvious, so investors have to think in a contrarian manner to devise ways to work around this. Expect that some breakouts will try to fake you out first, so buy less when a stock is 5% up with the idea of finishing your position on a normal pullback.

Q: What would be a good strategy to use when buying a stock that pulls back after breaking out of a base?

G: You can probably buy a small position and see if they hold their 50 day mving average first...if volume comes in then you can increase the position. With most of these pullbacks into the 50 dma I like to buy 'em as they come right into it, even if they look scary. Sometimes you have to have a little courage when buying on pullbacks, because they don't make it easy. It's not like they send out invitations to buy them...but if you are trying to buy them after they've bounced off the 50 day then start small and see if they hold the 50, then add if volume comes in on the upside.

Q: What are some of your favorite stock market books?
G: With respect to some of my favorite stock market reading, I would say to start with anything by Richard D. Wyckoff, including his books "Stock Market Technique, No. 1," "Stock Market Technique, No. 2," "How I Trade and Invest in Stocks and Bonds," "Studies in Tape Reading," "Wall Street Ventures and Adventures Thru 40 Years," and whatever else you can find by him. Along with Nicholas Darvas and Jesse Livermore, much of O'Neil's philosophy is derived from Wyckoff and I think it is useful to have a thorough grounding in the thinking of Richard Wyckoff. I also like Victor Sperandeo's books, "Methods of a Wall Street Master" and "Principles of Professional Speculation."

Q: How long is your average trade?

G: Average trade can be from a few days to a few months. Essentially we're trying to distill down to the primary market leadership in any rally or bull phase.

Q: Do you do trade mutual funds, stocks, or ETF's?

G: We only make recommendations on stocks or ETFs that are fairly liquid. Mostly stocks, however.

Q: Do you need to put a trade in during market hours or can you do it the night before the market opens?

G: I generally put my trades in during market hours. But as an individual investor, you could put in stop orders on whatever system you are using the night before if that works better for you.

Q: When you find a stock idea, do you concern yourself with the fact that earnings are coming out in the next week?

G: To some extent, that's why I won't take a huge position going into an earnings report, but if the breakout is good and on strong volume, I think its okay to come in with a 5% position - if the stock breaks 10% on the earnings that will cost you .5% in your portfolio which i think is quite tolerable.

Q: How do you measure a distribution day?

G: I have always considered distributiion days to be more a function of what is happening to leading stocks, rather than the indexes, so all of these "rules" about adding and subtracting distribution days to me are somewhat arbitrary and confusing. I watch the action of my stocks and leading stocks in the market. If they are getting hit, and the indexes are down big on heavy volume, that is distribution, and what my own stocks do determines how I will handle my positions, not whether the indexes have a certain number of distribution days. I just watch my stocks, which are usually leaders in any bull phase, and if my stocks are getting hit along with the market. I don't pay attention to all these rules about distribution days since I know what distribution looks like when it hits the market based on what is happening to my own stocks, and I can sniff out a top in the market this way.

Q: Gil, say one has 10 positions on, and we get a selloff, and some of the stocks are holding up while others are taking a beating. This is where I freeze up. Is it best to take some size off in stocks that are selling off with no support and leave the ones that are holding up alone?

G: If you are fully on margin and your stocks are all sticking straight up, you can consider backing off margin by cutting back on these positons. Stocks near support, or which seem to be acting better, you can try to hang on to. I try to remain fluid so I will cut back my positions, maintaing core positions in my favorite stocks, and "trimming" around the edges. But if the market continues to weaken I will continue to cut back. I am also not afraid to move back and forth as I cut back and then buy back portions of my positions that I sold. It's always easier to think when you have cash or at least buying power in your back pocket and you are not up to your eyeballs in stock! Stocks are not real estate. You can sell them and buy them back with the click of a mouse! Use that liquidity to your advantage.

Q: Do you hold stocks going into earnings?

G: Usually I watch how the stock acts going into the close before earnings. Holding stocks into earnings is tricky, and can be dangerous, so there is no simple answer to the question. You have to consider where you are with the position, cushion-wise, and what you will do if the stock "lays an egg" with a bad or unsatisfactory earnings report and what type of damage you can tolerate in your portfolio.

Q: How do you feel about using covered calls in addition to your stock purchases?

G: I've never done it. When I buy stocks I am looking for strong, even explosive upside, so writing covered calls is just a limiting strategy with respect to my methodology since you may simply have your stock called away from you. For example, why write covered calls on a position when it was trading at 31? What would I write to get any meaningful premium given where the stock is now trading? The 35's, the 40's? It's just not what I'm looking for in my quest for extreme performance. Covered call writing is only appropriate, in my view, for buy-and-hold investors holding stocks during a bear phase, or investors who hold dull stocks that rarely move out of a long-term trading range, such as Procter & Gamble (PG) for example, and who have little expectation that these stocks will move out of these trading ranges.

Q:What happens when we get a market correction? Do you let your stops take you out as opposed to actively taking profit?

G: Initially, when taking positions, you are letting your stops take you out. Once you are starting to show profits, then you try to let your strong winners run while taking 20% profits on stocks that take longer than three weeks to move that far. If I've been making money for a while and the general market starts to give signs that it is correcting, I will generally just take my profits and go to cash.

Q: I will be out of the country for 5 days in June and 12 days in August and will not have access to a computer. Do you sell your holdings when you are on vacation?

G: I rarely go on vacation when I'm in the market, and if I do, I bring my traveling trading cockpit, which consists of two very powerful laptops. I often prefer to vacation in Hawaii since the market opens there at 4:30 a.m. or 3:30 a.m., depending on which time of the year I'm there, so I can trade until 10 or 11 a.m. and then hit the pool with my family!

Q: Reading the Gilmo Report I sometimes get what I call the "candy store syndrome"; so many candies to choose from, so which do I buy? Since there are so many great stocks that you feature, which do I buy if I can't buy them all?

G: I actually trade in and out of 10-15 stocks in my concentrated portfolio, 20-30 in my diversified, and I do think it's more a matter of letting the market tell you which is "the stock you have to own," as I don't consider it something I can determine beforehand. I tend to shift around a bit, but keep some core positions. right now biggest, "core" positions are VMW, MTL, SOHU, and CSIQ, and I just bought MTL and VMW back this morning off the open. It is possible I could sell anyone of these today or at some time in the next few days if they start acting improperly, so please keep that in mind.

You have to find the right buy points, and I don't think it's only "5 stocks you must own now" since there are a lot of interesting situations showing up right now (May 15, 2008 - Ed.). Most of the original breakouts are somewhat extended, but I will cover these stocks in my report when I think they are approaching proper entry points. Going forward I will do my best to give some insight into what I believe makes a stock a "must own" rather than try and pick a handful of "must owns," since that can change very quickly. Our ultimate goal is not to spoon-feed you, but rather to empower you. So we don't want to give you a fish, but rather teach you to fish.

Q: How do you handle a whipsaw/shakeout, i.e. do you sometimes buy a stock back?

G: I do not concern myself with missing 2 or 3 points on a stock, so the difference between say 23 and 26 on a stock is meaningless to me, because I want the move from 29 to 60 and I want to be well-positioned and heavy into that sort of move should it occur. Some of my biggest winners panned out exactly this way. In 2004, I bought 100,000 AAPL around 36.50, then cut it back to 50,000 when it pulled in again. Then the stock took off through 42 on an earnings announcement and I bought back that 50,000 I sold and another 200,000 right there. The stock never really looked back from there.

Q: If I have a stock that goes up 15+% from the breakout point, when do I sell it? Do I move my stop up to 5% from the top? You say on your report, the rules change. What are they?

G: If I have a stock that goes up 15% from the breakout point, I consider that I'm just getting started, and am thinking more in terms of where I want to add to my position, since the stock is initially showing me positive results. I am not worried if it comes back to where I bought it, because it may. I am more concerned with identifying and capitalizing on a potential big winner. Once a stock goes up 20% or more from a breakout point, unless it has done so in 2-3 weeks, one can consider taking a profit, either some portion (perhaps 1/2) or all of the position, and see if the stock sets up in another base. Often, stocks will break out, go up 20%, and then build another base, unless they show extreme power in the first 2-3 weeks. So by taking profits in this manner when you have a stock that goes up 20% in four weeks or more, you might gain the luxury of sitting back and letting the stock show you another proper buy point.

Q: If the breakout point is 20, should I go in and set a pre-programmed buy at $20.50 regardless of volume?

G: Yes. At the end of the day, you will know if the volume is sufficient for a bona fide breakout. Lately, however, we have been seeing breakouts occur on average to below-average volume but then a few days later they start showing better upside volume. Also, I have bought many breakouts showing heavy volume early in the trading day, but by the close the volume has dwindled and is not above-average for the day - if they hold up and show heavier volume some time in the next few days, I might end up holding them.

Q: I got spanked big on a trade in April and I'm scared to death to make a trade which caused me to miss great moves on the stocks I watch like SOL and your recommendations. I follow the Bill O'Neil methods and always use a 6-8% stop which caused me some pain with March and April swings. I'm just about ready to give up and I really don't want to but I'm terrified to lose again.

G: Fear is a powerful emotion, and it sounds like it has a strong grip on you. Bill O'Neil taught me a primary lesson: "Never operate from a position of fear." I would suggest paper trading for a while to re-build your confidence. You simply cannot invest in the markets if you are operating from a position of fear, and I urge you to conquer it, because not only will it help you to learn to invest successfully but it will also help in every day life. I believe that the emotions and foibles that we all exhibit in our day-to-day lives as humans, even people like myself and Bill O'Neil whom I worked with for over eight years, can often be magnified in the stock market. By learning to conquer them in the stock market we thereby improve our personal lives.

Q: Can you elaborate more specifically as to how you apply stops once the stock has a profit?

G: I take 20% profits if a stock takes four weeks or more to run up 20% or more. I then watch the stock to see if it builds another base. If a stock goes up 20% in two to three weeks or less, I hold it for eight weeks at a minimum, since it is showing extreme power and I may have a big winner on my hands. That is textbook O'Neil. I do not use trailing stops since winning stocks can pull back 10%-12% as a normal course of their uptrends. In general, I stay with a stock as long as it acts well, and may trade around a core position in order to give myself some psychological comfort. I am not a fan of mechanical "trailing stops" and take more of a right-brained approach to figuring out when a stock has run its course. Since my methodology indicates that I am trying to find big-winning stocks, I am not so interested in taking little profits along the way, necessarily. If I buy a breakout and it doesn't seem to be getting any thrust to the upside, I often just sell it, and if it starts to show strength again I may come back to it. Also, I usually don't wait for the 7%-8% downside stop when taking an initial position. Two to three percent is often it for me, and if the stock does turn around and start up again I'll just buy it back.

Q: When you recommend. to buy a stock, what if earnings are coming out soon on it? Do you go ahead in spite of that?

G: The bottom line is where you are with your overall portfolio and the stock in question. If you are up 15%-20% in your portfolio, then you can withstand a potential earnings hit if you scale the position properly.

Q: How many stocks is it best to watch?

G: I think that depends on the person. Success in the market is often achieved by understanding what works best for YOU.

Q: I see that some stocks once they break out of a base follow the 10-day moving average. What are your thoughts on this?

G: Stocks hold above the 10-day moving average until they don't. I don't consider it a useful area of support, other than that a stock that continues to hold above its 10-day as it breaks out and continues higher is showing exceptional strength. So it can be looked at as a measure of power and strength. Eventually, however, it will drop below the 10-day, and may even pullback to the 50-day, but that doesn't really mean anything to me. On a short-term basis, I do like to use the 20-day as a place to add to strongly-performing stocks. I know a lot of people use the 21-day because 21 is a Fibonacci number, but I'm trying to get the jump on 'em so I use the 20-day!

Q: Usually the 50-day moving average and the 10-week moving average are a bit apart from each other. But when they are further apart than that, which do you lend more credit to?

G: I would watch both moving averages. Sometimes a stock bounces off the 50-day, sometimes the 10-week, so when the stock is close to either is the time I'm looking at buying them. Either way, I'm not quibbling over a point or two when I'm trying to find a stock that is potentially going to have a bigger move.

Q: When the market is in a downtrend, would you consider buying a stock before we had a follow-through day in the averages?

G: If a stock is showing strong action on a breakout, or appears to be at a logical pullback point, I might consider buying the stock before a follow-through day, with one eye on the exit door.

Q: I am new to investing. I have a question regarding volume. I am getting confused about big volume, low volume, and other characteristics of volume that you describe in your commentary.

G: When I speak of heavy volume, I am referring to volume that is in excess of 125% of average daily volume on a daily chart, and on a weekly chart volume that is just higher than average weekly volume.

Q: What is the "three waves down" principle?

G: This is, to some extent, a corollary to The Rule of Three, something that is in fact observable in a number of situations. The Rule of Three may be applied when we see a stock, on the weekly chart, put in three clear downtrends or "legs down" within an overall downside move that bottoms out after the third leg down. Usually by the third leg down everyone who is going to sell has already sold. If the general market is showing positive action, these patterns can sometimes be bought. Obviously, you maintain your stop-loss discipline on any stock you buy, and there is no guarantee the pattern will work. But if the stock can get moving the upside moves can be explosive. One example is Excel Maritime Carriers (EXM) from the October 2007 top and into 2008.

Q: Do you have any tips on how to tell which cup-shaped bases that have distribution on their left sides will ultimately be able to break out and advance meaningfully?

G: There are no hard and fast rules on this. Remember that it is normal for stocks to get hit on pretty good volume once they've run up a bit, and usually this is dependent upon the state of the general market. The key, however, is that once you see the heavy volume on the left side, you want to see how the stock acts after that. Does it stabilize? Does it get volume support? Does the selling dissipate? If the selling dissipates, you might see the stock stabilize and hold tight even if volume is not necessarily picking up. Once the stock has stabilized, builds a new base, and breaks out again, I think it is okay to buy the breakout using your stop-loss rules. But you will actually find that a lot of stocks that look "ugly" on the left sides of their bases will absorb the selling, set up again, and then go higher. I don't think you can really tell if heavy downside volume in the left side of a base is a negative. In stocks with very strong fundamentals, all this ends up doing is shaking out weak hands and bringing in strong hands. It's the action AFTER the heavy downside volume as the stock stabilizes and builds a new base as well as the volume on the ensuing breakout that matters most to me.

Notice how Research in Motion (RIMM) in early March 2007 and then again in early April 2007 got hit twice on heavy volume, but then the stock held tight as volume diminished. Note that the breakout attempt on the week of 4/6/07 occurred on light weekly volume and failed. But the breakout that occurred on the week of 5/11/07 had strong above-average volume and it worked.

Crocs (CROX) did the same thing and broke out on above-average volume the week of January 12, 2007 but the general market went into a correction and CROX came down with it, forming a new base that was a cup-with-handle with a "wedging" handle that worked. I think the key is to watch the breakout volume when a stock comes out of a base with heavy downside volume on the left side.

Q: What criteria do you employ in your screens looking for short-sale candidates?

G: I keep a list of stocks that have had big price breaks within the last 6-7 months, and which were former leaders. Every day I run a Down on Volume screen and go through it, picking out former leaders that were hit very hard on heavy volume. Those go into a watch list, which I then review every day once the market goes into what I feel is a bear trend. You can use IBD to do this by going through each of the stocks that are down on volume. For example, you would look at the "NYSE + NASDAQ Stocks On the Move" list and look at all the stocks listed in the bottom half of the list, below the triple horizontal lines. There's no real secret, it's just a matter of maintaining a watch list of such stocks. Every day just check the charts against the down on volume list in IBD, and select those that look like they fit the bill.

I watch my list every day to see how right shoulders or other set-ups develop to pick my spots. No magic to it, just a little bit of elbow grease and the ability to recognize a potential short-sale set-up on the chart.

Q: What fundamental analysis is done in support of Gilmo recommendations?

G: I use a collection of 18 proprietary fundamental screens to narrow down the entire universe of US equities to a watchlist universe of about 150 stocks that meet my fundamental criteria and which show favorable technicals and institutional accumulation. From there, a bit of elbow grease is applied in narrowing my primary selections down to a group of about 20-30 stocks. I don't necessarily look for current earnings growth, as I have found strong forward estimates to be an equally effective driver of price performance, as in the case of US Steel (X) back in March 2007, and some of the coal stocks of 2007 like Fording Coal (FDG), for example.

Q: In a recent report, you wrote "And stocks that break out and then fall back beneath their breakout point should be sold immediately." Is that a strict rule of yours or was it just relative to the questionable general market at that time? I thought that a stock could be sold no lower than 7% to 8% below its buy point; therefore if it is bought near its breakout, the stock could fall somewhat below its breakout and be ok to hold.

G: In a market that I believe is in the latter stage of a bull cycle, I will normally sell a stock entirely if it violates its original buy point on the chart. In a normal bull phase, I will usually sell 1/2 my original position if a stock fails at the breakout point, holding the other 1/2 to see if it hits the 6-7% stop-loss I normally would use. If the stock breaks out again, I simply buy back the other 1/2 since I'm not worried about a few points of wiggling, I'm more concerned with buying for a big move.

You can stick to strict, percentage-based sell-stop rules if you want to, and that's okay, but as a skilled investor with many years of experience, I have additional rules that I employ which I believe optimize the process for me.

Q: This morning I was watching two stocks for short sale entries. When they started going down I was worried that they were getting away from me so I set a limit order on each one. I was executed on both because they turned around and went up. How do you handle this type of scenario where you would like to see them rally up to start with into the 50-day moving average?

G: I wait for the stocks to get to my short-sale point. If they start going down before that, I don't chase them. They must get to my short-sale point, otherwise I sit tight. Usually, if you are patient, they will come to you. If they don't, you simply watch and wait for another chance to go after them. Watch your emotions! Take your time and be methodical, not emotional.

Q: You say that you do not listen to analysts, but do you take into account earnings? Or depending on the earnings and the stock's reaction will you only be out if the stock hits your stop? If you see a pod forming or another troublesome pattern and the stock is up big and reports bad earnings will you jump the gun so to speak to take a short position? I ask because some say that stocks start breaking down technically prior to the fundamentals.

G: I prefer to see the stock show some initial weakness, and then I'll go after it. Also, if I am short a stock and it rallies on earnings it has to hit my stop for me to exit. Usually, however, if I have a profit on a stock as it is going into an earnings announcement, I will bag my profit and wait to see how the stock acts on earnings before deciding whether or not to short again.

Q: I use Daily Graph Online, Stock Graphs, Custom Screen Wizard, and Industry Groups. Can you suggest what you might consider to be one or two of the best custom scan settings I could use on a daily basis? My thoughts are that relative strength and accum/dist would be two of the more important settings.

G: I would use a screen every day that picked up stocks with a combined EPS + RS rating of 160 or higher, Accumulation/Distribution Rating of B or higher, Composite Rating of 75 or higher, and up on volume for the day of at least 25% above average daily volume, also read as 125% of average daily volume. This is a very good daily and intraday screen to run to pick up stocks with strong fundamentals that are moving on the day.

Q: I'm a new subscriber to the reports and I have a question regarding "actionable ideas". IBM has been pointed out in the last two reports as a stock to keep an eye on. Should IBM become actionable, as a subscriber will I, 1) learn of it in the reports or 2) receive an e-mail notification notifying me of the "idea" or 3) receive an e-mail directing me to a new report containing the price points, etc. I'm just trying to understand how the ideas are disseminated to the subsribers and to understand how buys/sells are communicated in between Wednesday's and Sunday's reports. Could you please help me to understand the process? Thank you.

G: The way I make "recommendations" is to discuss an idea I like and under what conditions I would move to buy the stock. So readers should make note of my comments regarding a particular idea and then be ready to take action when the conditions I have outlined occur. I prefer this method since I believe sending an email forces readers to become overly dependent on being fed a fish, rather than learning to fish themselves. The intent behind the entire website is to introduce ideas and the thinking behind those ideas, including the conditions under which a stock should be purchased, and allow readers to incorporate some of their own judgment into the process. I consider my website more of a guiding service and not a "buy here, sell here, buy here, sell here" service that essentially leads subscribers around by the nose.

I feel that I am helping subscribers most by imparting an understanding of how and why an idea becomes actionable, and then to allow them to take these guidelines and impart their own judgment, timing, and thought to it. In this way I feel subscribers are empowered over time. I understand that over time a subscriber might become increasingly empowered as they learn from my thinking and eventually have no need for the website and cancel their subscription, but I feel that if this is the case then I have done my job.

Q: With all of the institutional trading that goes through "alternative" new breed exchanges, does this volume go under-reported and/or alter your methodology in any way?

G: I have been concerned about the activity in so-called "dark pools" where trading takes place and the volume is not recorded in the price/volume data for the stock. So far, it has not forced me to alter my methodology, but it is certainly something to think about when you see a stock break out with little volume, and then the next day or two volume starts to come in. In cases like this I wonder if perhaps there wasn't some initial buying in a dark pool that hid some of the buying on the breakout, and so forth. It certainly gets one's mind a-whirring, that's for sure! ;)

Q:How do you evaluate the % of float that is short intrest?

G: The higher the % of the float that is sold short, the more likely is the possibility of a short squeeze and rally to the upside if the shorts are forced to cover. If I see a great stock with great fundamentals showing relatively high short interest of 8 days or more then I see that as an added plus.

Q: Can you elborate on what you mean by "The Big Stock Principle"? Since I've only been a subscriber during the '08 Bear market, I don't have a feel for your goals with this principle. Beyond finding the big stock(s) of each uptrend, will you explain how you pyramid in them with follow-up buys, margin, portfolio management, etc.? Will you be talking about price objective, conviction, and staying with the big stock(s) as long as possible? Are you of the same mind set as O'Neil on this or have you come up with things that work for you?

G: I am looking for highly profitable companies, as expressed by their return on equity and profit margins, showing large increases in quarterly and annual earnings and sales. ROE should be in excess of 15-16%, and the higher the better. GOOG, for example, when it began its run in August 2004 had an ROE in excess of 87%. I like to see quarterly earnings and sales growth of at least 20%, but preferably much higher than that, say 100% or more. The biggest factor in my stock selection is understanding a company's position as an innovator. I'm looking for companies that are at the cutting edge of what is going on in the economy with a critical product or service that is selling like gangbusters. This is what I call the "Big Stock" factor, and when a company is a leader in its industry with products and services that are at the forefront of what is driving growth in the economy and in its particular sector at any given time then institutional investors (e.g., mutual funds, pension funds, etc.) will have to own that stock. It is their buying power that drives a long-term price move, because they will tend to have a 3-5 year horizon when they buy a stock. Strong buying by quality institutional investors with an outstanding track record is a key characteristic I look for in any stock I'm interested in, because that is where the big money is made. AOL in 1998-1999, QCOM in 1999-2000, AAPL in 2004-2007, GOOG in 2004-2007, RIMM in 2003-2007, these are what I call "big stocks," in the sense that they are institutional "must own" stocks.

Q: How should one operate in different follow throughs? It seems to me that we have FT's like in March '08 with old stuff and stuff coming off the bottom, and you seemed to be very quick to get out on any market distibution. Then there are FT's like in '03 with lots of new stuff, and the potential for huge gains, where sitting tight and not losing one's position, giving some room, would seem to be the right approach. Do you make such a distinction of FT's in your thinking or market operations vis a vis trading around positions vs holding on?

G: Marginal follow-throughs in markets that are "late" in the cycle, such as we had in March generally mean, at least from my perspective, that you don't want to give your positions too much room, since some could be breaking out of late-stage bases, and breakout failures from these can be brutal if you sit too long. If we are in a newer bull market with lots of new leadership, I am more likely to give the positions some room. It all boils down to trying to assess the strength of the follow-through based on the types and positions of stocks that are breaking out, as well as the general "age" of the market in the overall bull market cycle.

Q: i am an australian subcriber that lives outside the US, in Malaysia. I love your reports and learn a great deal from them. My main challenge is the time zone. Malaysia is 12 hours ahead of New York. I currently work during the day and later trade in the first hour and set limits/stop losses on my trades. It's not the optimum way of trading your way but at the moment I have little alternative. My question is do you think your trading strategies can still work when some people have restrictive access to the market during the trading day? i am open to getting up during the night but not sure when as key decision times vary from day to day.

G: I believe that given the price guidelines I put out in the report with respect to various stocks, if one has a trading platform that allows one to set automatic buy-stop and sell-stop orders on the system then it is feasible to make use of the ideas. Often, when I sell short, my cover point is an automatic buy/cover-stop order so that my emotions do not get in the way.

Q: I understand that institutions move the market. I hear statements that "the average daily volume on this stock is too thin for institutions to want to get into." I am uncertain as to the average daily volume and price per share needed in a stock for institutions to consider entering that stock. Please tell me what you suggest to be a minimum "average daily volume" and a minimum "share price" requirement for a stock for an individual investor as myself.

G: Institutions may, in some cases, take positions in smaller, thinner stocks, particularly if they are small-cap mutual funds. However, since the relatively low trading volume and float of these types of stocks makes it difficult to buy a large position, they will often just buy a very small position. I myself prefer to trade in "big stocks," or stocks that 1) are above $10 in price, because most institutions adhere to some price rule where they will only look at stocks that are a minimum of $10 to $15 a share, and 2) trade at least $35 to $40 million in average daily dollar volume (share price x average daily volume, so that a $10 stock that has average daily volume of 1 million shares has an average daily dollar volume of $10 x 1 million, or $10 million average daily dollar volume).

Remember, however, that if you find a small stock with outstanding fundamentals that trades only 100,000 to 200,000 shares a day, and your account size is small enough so that buying 100 or 200 shares is a good-sized position for your account, you can pretty much play anywhere you want if the stock is sound.

Q: What do you consider high short interest for a stock? is it a certain percentage of the float or something else?

G: Ten days or more of short interest is pretty high in my view, particularly on a stock that only trades a few hundred thousand shares a day. A lot of these big earnings gap-ups are due to a lot of shorts having to run for cover. I am not aware of any study that proves that a stock that is some percentage above the 200-day moving average is going to pull back, or that there is some magic percentage at which they will automatically top out. A general rule is 70% above the 200-day moving average, but if you short a stock when it is 70% above the 200-day it could easily continue to a point that is 90% above the 200-day moving average, handing you a nice loss on the short side.

Shorting or selling is not that black and white, and shorting a strong stock just because it is a certain percentage above the 200-day moving average is not an automatic trade and can be dangerous in my view.

Q: Could you please explain a "short stroke" pattern?

G: As I understand it, a short-stroke forms after a stock has a big move up on a weekly chart on a breakout, and then the next week has a very tight range and the stock closes at the peak of the week as volume dries up. You can see this on the attached RIMM chart. The short stroke is only a week long. After a big run-up from its breakout, a stock may show tight trading action for a week as volume drops. Usually it stays about flat compared to the prior week. If you spot a short stroke and the stock meets all your other buy criteria, when should you buy? Wait for it to surge on heavy trade, which indicates mutual funds and other big players are buying shares.

Q: What were some of your biggest biases or problems that you had to overcome when employing the CANSLIM strategy? After reading O'Neil's book I wrongly assumed I could trade successfully within 6 months, but it wasn't until almost a year of stock chasing and buying near earnings(learning the hard way in both cases) that I've gained the confidence to invest.

G: It took me two years to get it down. My biggest bias, and probably my only significant one, was that at first I tended to want to buy 15-20 dollar stocks, instead of realizing that 50,60, 100 or more dollar stocks were of much higher quality. Other than that, I was brand new to the business and the stock market in 1991 when I started as a broker at Merrill Lynch, and O'Neil's book was one of the first I read, and certainly the first one that made any sense to me, so I really had no bad habits that I had learned previously. I was like a blank sheet of paper, so once I read O'Neil's book there was nothing prior that had to be "erased" first! Be persistent, recognize that mistakes are part of the learning process, and you will get there.

Q: I am looking for direction in the market. Is the Gilmo Report for me?

G: The way I make "recommendations" is to discuss an idea I like and under what conditions I would move to buy the stock. So readers should make note of my comments regarding a particular idea and then be ready to take action when the conditions I have outlined occur. I prefer this method since I believe sending an email forces readers to become overly dependent on being fed a fish, rather than learning to fish themselves. The intent behind the entire website is to introduce ideas and the thinking behind those ideas, including the conditions under which a stock should be purchased, and allow readers to incorporate some of their own judgment into the process. I consider my website more of a guiding service and not a "buy here, sell here, buy here, sell here" service that essentially leads subscribers around by the nose.

I feel that I am helping subscribers most by imparting an understanding of how and why an idea becomes actionable, and then to allow them to take these guidelines and impart their own judgment, timing, and thought to it. In this way I feel subscribers are empowered over time. I understand that over time a subscriber might become increasingly empowered as they learn from my thinking and eventually have no need for the website and cancel their subscription, but I feel that if this is the case then I have done my job. On the other hand, if this is not what the subscriber is looking for, then obviously they should not be a subscriber. In the end, the consumer is king!

Q:In addition to a follow-through day and individual stock leadership, what are your primary indicators for analyzing market bottoms?

G: I focus primarily on price/volume action in the indexes and leading stocks. Leadership is probably the key component, and the number of set-ups I pick up each week, e.g., stocks in nice, tight bases, can often tip me off to a strong market rally developing very soon. Sentiment and oversold indicators, particularly the % of stocks above their 150-day moving average, are also taken into account, but for the most part I let the tape tell me the story.

One indicator I'm not so sure about anymore is the Public/NYSE Specialist short interest ratio, since the NYSE specialist has become less and less of a force as trading has moved away from specialists and market makers and towards the almighty ECN.

Q: I have heard of a buy signal being given if a stock is up in 12 of the past 15 days. Where would the actual entry point be?

A: I look for 11 out of 13 or 12 out of 15 days up in a row after a breakout. Once the stock does this, I'll wait for it to move sideways or perhaps pull back for anywhere from 3-10 days, and once it moves back out through the top of this little formation I will come into the stock heavily as I add to my original position, or even sometimes just enter the stock for the first time.