This article continues the weekly series of out-of-sample testing that focuses primarily on the two segments of my research that show the most potential for highly volatile positive breakouts and negative breakdowns. For 2017, I have been publishing a small sample of weekly breakout stock picks based on algorithms from my doctoral dissertation that identify price momentum anomalies and reversals. These selections include both high positive momentum breakouts as well as negative momentum stocks, based on the strongest documented characteristics of short-term momentum price behaviors. More about the research methodology and a link to my study can be found in my primer article on quick pick momentum accelerators.
Prior Week Performance
This approach by no means removes idiosyncratic risks (e.g., bankruptcy, SEC investigation, lawsuits, broad market changes, institutional fund changes, unexpected earnings announcements, loss of corporate officers, and other corporate catastrophes), but some significant probability of accurately classifying a stock into a particular momentum category for current and future momentum returns appears to exist in the short-term. The ongoing out-of-sample testing provided here using unscientific sample sizes of 8 and 4 (from among thousands of stocks) is only intended to provide short-term breakout (breakdown) forecasts that may give you some trading benefit.
Last week selection performance (see Week 12 Breakouts)
The markets suffered their first downturn last week of more than 1% in a day, ending the longest stretch of low volatility since May 1995 with a final run of 110 consecutive days. Short positions likewise outperformed the long positions in total portfolio with AAMC and FPRX both returning more than 10% during the week. IDRA was the best performer of the long positions returning more than 20% in 5 days. Continued momentum among some of these stocks can be expected. Though prior week selections are deliberately excluded in the following week's selection, certain prior week stocks continue within the strong momentum parameters.
Selections for Week 13 are as follows:
Benchmark indexes: S&P 500 ~ 2343.98 // DOW ~ 20599.74 // NASDAQ ~ 5828.74
Positive Acceleration Momentum Stocks
These stocks have strong characteristics of positive momentum into acceleration for short-term gains. The typical momentum duration horizon from this analysis appears to be one to three weeks. Based on past analysis, it is not uncommon for stocks to sustain the momentum criteria for longer periods. An over-representation of healthcare and technology stocks were present in this weeks screen. The selections of positive momentum stocks for this week include ANW, BCRX, CBK, GALT, GSAT, KEM, XOMA, XXII:
Negative Acceleration Momentum Stocks
These stocks have strong characteristics of momentum decline into acceleration for shorting opportunities. The typical momentum duration horizon from this analysis appears to be one to three weeks. Based on past analysis, it is not uncommon for stocks to sustain the momentum criteria for longer periods. An over-representation of basic material stocks, services and financial stocks were present in this weeks screen. The selections for negative momentum stocks for this week include EGL, GS, SCHN, ZEUS:
This approach outperformed in 2016, and I am hopeful it will continue to be a reliable indicator of momentum conditions across the momentum cycle throughout 2017. Your comments on this ongoing study are appreciated. A list of prior week selections and performance can be viewed here.
My personal preference is to invest in long positions and not to identify companies for shorting. However, in the interest of documenting both positive/negative momentum breakouts using my algorithms, a small sample of negative accelerators is included. As always, I hope you capture the most beneficial of these breakout (breakdown) candidates and have a profitable week of trading!
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in XXII over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.