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 14 Breakouts)
Last week, a less negative earnings report for Fred's (FRED) resulted in a significant -10.53% reversal of a short position. It was not clear what contributed to a -17.31% reversal in Sangamo Therapeutics (SGMO) long position and you can expect this level of extreme volatility to continue as we have seen in prior weeks. In fact, from Week 13, we saw Galectin Therapeutics (GALT) and 22nd Century Group (XXII) sustain high volatility and their momentum has continued past 30% gains in two weeks. Though the immediate prior week selections are deliberately excluded in the following week's selection, certain prior week stocks continue within the strong momentum parameters. A recurring phenomenon is that the negative momentum selections do not appear to sustain as long as positive momentum selections and positive reversals are quite frequent.
Selections for Week 15 are as follows:
S&P 500 ~ 2,355.54 (-0.30% from week 14)
DOW ~ 20,663.22 (-0.03% from week 14)
NASDAQ ~ 5,828.74 (+0.84% from week 14)
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. Some stocks from prior week selections remain strong on the parameters screened for high momentum and are reintroduced again this week. The selections of positive momentum stocks for this week include China BAK Battery (CBAK), Intellicheck Mobilisa (IDN), China Finance Online Co. Ltd. (JRJC), Kandi Technologies Group (KNDI), NL Industries (NL), Platform Specialty Products (PAH), RLJ Entertainment (RLJE), and Revolution Lighting Technologies (RVLT):
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. The selections for negative momentum stocks for this week include Strattec Security Corp. (STRT), ArcBest Corp. (ARCB), Lawson Products (LAWS), and Acorda Therapeutics (ACOR):
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 am/we are long GALT, RVLT.
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.
Additional disclosure: In addition to my current long positions I may initiate additional positions in the coming week.
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.