SEPA is a systematic stock selection and trading strategy put forward by Mark Minervini in his book "Trade Like a Stock Market Wizard", which stands for "Specific Entry Point Analysis". The goal of the SEPA strategy is to find those "super stocks" that are about to enter or have already entered the stage of rapid price increase and maximize the gains in the process.
Definition: Trend refers to the overall movement of stock prices. The SEPA strategy emphasizes that only when a stock is in a clear upward trend is it worth considering for purchase. Trend is the foundation for stock price increases. Without the support of trend, any other factors may become irrelevant.
Criteria:
- The stock price must be in a definite upward channel: The SEPA strategy requires that the stock price must have formed a clear upward trend, usually manifested as the stock price gradually rising along an upward trend line or moving average line.
- Breaking through key resistance levels: The stock must break through certain important technical resistance levels, such as the 50-day moving average, 200-day moving average, previous highs, etc. Such breakthroughs are usually accompanied by an increase in trading volume, indicating that the market's interest in the stock is growing.
- High RPS rating: The stock's RPS250 should be higher than 80, preferably close to 90 or higher. RPS250 measures the price performance of a stock relative to that of other stocks in the past 12 months. A high RPS indicates strong market confidence in the stock.
Importance: Trend is the key driving force for stock price increases. Only when a stock is in an upward trend can investors buy with more confidence and expect continuous price increases in the future. Trend not only reflects the supply and demand relationship in the market but also embodies the market's expectations and confidence in the stock.
Definition: Fundamentals refer to a company's financial condition and business performance. The SEPA strategy emphasizes that only when a company has strong fundamentals can its stock achieve significant long-term price increases. Fundamental analysis helps investors evaluate a company's profitability, growth potential, and industry position.
Criteria:
- Strong earnings per share (EPS) growth: The company's EPS growth rate should exceed 25%, preferably exceed 50% or higher. The EPS growth rate in the past several quarters should show a trend of accelerating growth, indicating that the company's profitability is constantly improving.
- High sales growth rate: The company's annual sales growth rate should exceed 25%, preferably exceed 40% or higher. Sales growth reflects the company's market competitiveness and business expansion ability.
- Stable or increasing profit margins and gross profit margins: The company's profit margins and gross profit margins should remain stable or gradually increase, indicating that the company has advantages in cost control and pricing power.
- Leading position in the industry: The company should be in a leading position in the industry, with unique products or services that can withstand competitive pressure and maintain market share.
- High institutional recognition: The company should be supported by multiple top institutional investors, especially those large funds with excellent performance. The support of institutional investors usually means that the market is full of confidence in the company's fundamentals and future prospects.
Importance: Fundamentals are the foundation for a stock's long-term price increase. Only when a company has strong profitability and growth potential can its stock achieve continuous significant price increases. Investors should give priority to companies with excellent fundamentals because these companies are more likely to continue to perform well in the future.
Definition: Catalyst refers to events or factors that can drive a significant increase in stock prices. The SEPA strategy emphasizes that only when a stock has a clear catalyst is it worth considering for purchase. Catalysts can be the launch of new products, the signing of new orders, management changes, favorable policies, etc.
Criteria:
- The launch of new products or services: Whether the company has launched new products or services, especially those in the innovation field. The launch of new products or services usually attracts more market attention and drives up stock prices.
- The signing of new orders or contracts: Whether the company has signed new large orders or contracts, especially in its core business area. The signing of new orders or contracts usually means that the company's future revenue and profit will have significant growth.
- Management changes: Whether the company has replaced its management, especially managers with successful experience. New management usually brings new strategies and execution ability, driving the improvement of the company's performance.
- Favorable policies or industry trends: Whether the company benefits from favorable policies or changes in industry trends. For example, new policies issued by the government may have a positive impact on certain industries and drive up the prices of related stocks.
Importance: Catalyst is an important driving force for a stock's short-term price increase. Only when a stock has a clear catalyst can investors buy with more confidence and expect a significant increase in the short term. Catalysts can not only attract more market attention but also bring actual performance growth to the company.
Definition: Entry point refers to when investors should buy stocks. The SEPA strategy emphasizes that investors should buy decisively when there are clear buy signals for stocks, instead of blindly chasing high prices or entering too early. The choice of entry point is crucial because it directly affects investors' entry costs and potential gains.
Criteria:
- Breaking through key support or resistance levels: When a stock breaks through an important technical support or resistance level, it is usually a good time to buy. Such breakthroughs are usually accompanied by an increase in trading volume, indicating that the market's interest in the stock is increasing.
- Forming a cup-and-handle pattern or a pocket pivot: When a stock forms a cup-and-handle pattern or a pocket pivot, it is usually a good time to buy. These two patterns are classic reversal patterns, indicating that the stock will enter a new upward stage from the adjustment stage.
- The RPS rating rising: When the relative strength rating of a stock gradually rises from a low level, it is usually a good time to buy. The rise in RPS indicates that the market's confidence in the stock is strengthening, and investors can take this opportunity to capture potential significant price increases.
- Increasing trading volume: When the stock price breaks through a key price level, the trading volume should increase significantly, indicating that institutional investors are actively buying. The increase in trading volume is an important confirmation signal, indicating that the market's demand for the stock is increasing.
Importance: The choice of entry point is one of the keys to investment success. Only when there are clear buy signals for stocks can investors buy with more confidence and expect continuous price increases in the future. Entering too early or blindly chasing high prices may lead to losses, so investors should be patient and wait for the best entry point.
Definition: Exit point refers to when investors should sell stocks. The SEPA strategy emphasizes that investors should sell decisively when there are clear sell signals for stocks, instead of blindly holding or leaving too early. The choice of exit point is equally crucial because it directly affects investors' final gains.
Criteria:
- Breaking below key support levels: When a stock breaks below an important technical support level, it is usually a good time to sell. Such breakdowns are usually accompanied by an increase in trading volume, indicating that the market's confidence in the stock is weakening.
- Forming a topping pattern: When a stock forms a double top, head-and-shoulders top, or other topping patterns, it is usually a good time to sell. These patterns are classic reversal patterns, indicating that the stock will enter an adjustment or downward stage from the upward stage.
- The RPS rating declining: When the RPS of a stock gradually declines from a high level, it is usually a good time to sell. The decline in RPS indicates that the market's confidence in the stock is weakening, and investors should be vigilant about potential downward risks.
- Declining trading volume: When the stock price rises but the trading volume fails to increase synchronously and instead shrinks, this may be a sell signal. The decline in trading volume indicates that the market's interest in the stock is decreasing, and investors should be vigilant about potential pullback risks.
Importance: The choice of exit point is one of the keys to investment success. Only when there are clear sell signals for stocks can investors sell with more confidence and lock in existing gains. Leaving too early or blindly holding may lead to missing subsequent upward opportunities, so investors should closely monitor market changes and adjust their positions in a timely manner.
Features:
- In the first stage, the stock price fluctuates unremarkably due to a lack of momentum.
- The stock price will fluctuate around the 200-day moving average. During the fluctuations, there is no substantial upward or downward trend, and this stagnant period may last for several months or even years.
- This stage usually occurs a few months after the stock price has fallen in the fourth stage.
- The trading volume is usually small, especially smaller than that in the previous fourth stage.
Notes:
- Avoid buying stocks in the first stage, no matter how attractive they may seem; even if the company's fundamentals look good, wait until the second stage.
- There is no need to try to buy at the bottom. Never think about buying at the lowest point and selling at the highest point.
- Don't buy when the price is the lowest or the stock is the cheapest, but buy at the right time when the stock is ready to rise.
Transition Criteria from Stage 1 to Stage 2:
- The stock price is above the 150-day and 200-day moving averages.
- The 150-day moving average is higher than the 200-day moving average.
- The 200-day moving average is increasing upward.
- The highest price of the stock is constantly rising, and the lowest price is also steadily increasing.
- During weeks with rapid price increases, the trading volume suddenly expands.
- In weeks with relatively large trading volumes, the number of weeks with rising prices is greater than that with falling prices.
Features: In this stage, the stock price has a clear upward trend, and the price curve rises in a step-like manner. The stock price is above the 200-day moving average, and the 150-day moving average is above the 200-day moving average. The second stage is considered the golden stage by the author and is the best time for investors to enter the market.
During the topping period, the fundamentals of the stock may still be upward, and the overall price trend is similar to that in the second stage. The stock price is still strengthening, but the price fluctuations will become more and more intense. Investors should look for opportunities to sell and take profits in a timely manner. A company cannot always beat market expectations. The fundamentals may still be upward, but the stock price has already reflected it in advance.
Features of Stage 3:
- Volatility increases, and the stock's price fluctuations continue to expand. Although the overall price trend is similar to that in the second stage and the stock price is still strengthening, the price fluctuations will become more and more intense.
- There is usually a situation where the price drops sharply when the trading volume is large. This is usually the largest single-day decline since the beginning of the second stage. In the weekly price table, the stock may record the largest single-week decline. Such price changes are usually accompanied by large trading volumes.
- The stock price may be below the 200-day moving average. When reaching the top, the price usually fluctuates around the 200-day moving average.
- The 200-day moving average begins to lose its upward momentum, gradually flattens out, and then enters a downward trend.
That is, the stock begins to decline significantly. The stock price is mainly below the 200-day moving average and constantly breaks new lows. Investors who did not sell stocks in the third stage should strictly implement the stop-loss mechanism and force themselves to exit the market at this time.
Features:
- The stock price is mainly below the 200-day moving average.
- The 200-day moving average is in a clear downward channel.
- The stock price is near the lowest point in the past year.
- The stock price constantly breaks new lows, showing a downward step-like rhythm.
- The short-term moving average is lower than the long-term moving average.
- On days or weeks with increased trading volume, the stock price drops sharply.
- On trading days and weeks with relatively large trading volumes, the number of days with falling prices is greater than that with rising prices.
The SEPA strategy helps investors identify stocks with high growth potential through five key elements and conduct buying and selling operations at appropriate times. The core idea of the SEPA strategy is to find those "super stocks" that are about to enter or have already entered the stage of rapid price increase and buy and sell at the right time. By combining these five elements, investors can evaluate the quality of stocks and potential investment opportunities more comprehensively and thus make wiser investment decisions.