Spectrum Of Momentum Stocks Dominating The Early Returns For January

by: JD Henning

The spectrum of momentum portfolios have a strong lead among the Forensic Positive and Negative, Value and Anomaly stock portfolios I track from various published research studies.

This follows my thesis based on a statistical analysis for 2018 that most fundamental selections failed to deliver meaningful differentiation from market benchmarks.

Early into January my 20 stock Premium Portfolio is up more than 12% heavily weighted toward momentum stocks.

This weekly progress report serves as a barometer of momentum conditions and signals market movement toward/away from the major types of portfolio models.

The 20 stocks in the Premium Portfolio from my membership service that draws from a wide range of different models in the financial literature has surged to 12% gains into early January. These gains appear to be primarily based on the strength of momentum and forensic negative stock selections that have been dominating the standard value and fundamental models. I will expand on the what these signals may mean for short-term trading.

This inductive portfolio model approach goes where the returns in the market can be found on the premise that different categories of investment strategies have some staying power under different market conditions. Much like the behavior of individual momentum stock characteristics with autocorrelation that sustain strong price movements, portfolio strategies can experience similar effects.

Based on the interest from readers of my last article on Funds And Fundamentals Breaking Down: What Are Your Best Alternatives For 2019? who have encouraged me to share more current examples to trade on, I have provided this list of top stocks. Not only are these many top performing stocks from this week, but the concentrations of portfolio type also may provide meaningful support to future return behavior.

Weekly - Top Performing Stocks from all the Active Portfolios * live updates
Portfolio Symbol Current Weekly Monthly

Forensic Negative Portfolio - November 2017

(NOVN) 18.31% 65.69% 12.67%
Forensic Negative Portfolio - October 2017 NOVN 18.31% 65.69% 12.67%
Forensic Negative Portfolio - September 2017 NOVN 18.31% 65.69% 12.67%
Breakout Stock Week 29 (AMRN) 16.07% 37.51% 4.65%
Bounce-Lag Momentum Week 43 AMRN 16.63% 37.51% 4.65%
Bounce-Lag Momentum Week 44 AMRN 16.63% 37.51% 4.65%
Bounce-Lag Momentum Week 45 AMRN 16.63% 37.51% 4.65%
Breakout Stock Week 12 (NEPT) 7.94% 34.44% 21.00%
Forensic Negative Portfolio - September 2017 (LLEX) 5.99% 28.26% -1.67%
Breakout Stock Week 17 (BLPH) 3.00% 23.81% -8.77%
Breakout Stock Week 43 (IPI) 3.83% 22.64% 5.86%
Russell 3000 Top 10 - July 2017 IPI 3.19% 22.64% 5.86%
Breakout Stock Week 17 (VCYT) 5.26% 22.15% 26.40%
Breakout Stock Week 11 VCYT 5.26% 22.15% 26.40%
Breakout Stock Week 35 (MEET) 3.05% 22.15% 48.84%
Breakout Stock Week 43 (NIHD) 6.82% 21.75% 12.94%
Russell 3000 Top 20 - July 2018 NIHD 8.06% 21.75% 12.94%
Bounce-Lag Momentum Week 45 NIHD 8.06% 21.75% 12.94%
Bounce-Lag Momentum Week 46 NIHD 8.06% 21.75% 12.94%
Breakout Stock Week 1 (HROW) 6.17% 21.71% 7.39%
Breakout Stock Week 50 HROW 6.17% 21.71% 7.39%
Russell 3000 Top 20 - July 2018 (PTSI) 3.37% 19.60% 8.29%
Breakout Stock Week 38 (WIN) 4.00% 19.25% 5.95%
Breakout Stock Week 34 (CGEN) 3.24% 17.62% -9.18%
Piotroski-Graham portfolio - May 2018 (VHI) 3.10% 17.26% 38.32%
Piotroski-Graham portfolio - March 2018 VHI 3.10% 17.26% 38.32%
Breakout Stock Week 22 (SYRS) 3.35% 17.13% -17.64%
Forensic Negative Portfolio - December 2017 (PIRS) 7.99% 17.05% -5.21%
Forensic Negative Portfolio - October 2017 PIRS 7.99% 17.05% -5.21%
Breakout Stock Week 29 PIRS 8.33% 17.05% -5.21%
Breakout Stock Week 6 PIRS 8.33% 17.05% -5.21%

Of the 16 stocks listed above from different active portfolios that delivered better than 17% this past week, only two stocks, Valhi (VHI) and P.A.M. Transportation Services (PTSI), did not come from either a Forensic Negative or Momentum-based stock portfolio. This tells me that the market is continuing to discount or deny top emphasis toward fundamentals-based selection models to some degree.

It also may reflect the condition of market health that has not yet returned to a focus on fundamentals and value where outperforming returns have been more highly correlated in the past. My ongoing barometer, based on the chi-square statistical tests conducted on 2018 key performance variables, continues to show that alternative selection models are more dominant under current conditions.

What does this barometer of stocks show?

A little background on the portfolio types that have emerged at the top this week is necessary.

First, the stocks from portfolios highlighted in yellow are classified as momentum-based stock selections. These are stocks that have strong characteristics of high volatility, money flow, strong positive technical signals, and an increasing level of positive sentiment building for momentum gains. They are not necessarily good value or fundamentals-based stocks, but ones expected to deliver quick short-term gains over regular periods as their technical parameters move through optimal trading ranges. Stocks currently in that category include: Amarin Corporation plc (AMRN), Bellerophon Therapeutics, Inc. (BLPH), Intrepid Potash, Inc. (IPI), Veracyte, Inc. (VCYT), The Meet Group, Inc. (MEET) and others on the list above.

Second, the stocks from portfolios highlighted in green come from the Forensic Negative portfolios with generally accepted negative fundamental characteristics. These stocks score poorly on three academic forensic models covering 22 different financial ratios and criteria.

My working theory is that stocks that achieve high adverse scores on all three forensic algorithms may be much more dependent on momentum and investor sentiment for price performance than on fundamental financial performance. This dependency on weaker fundamental financial data makes the firms more susceptible to larger price fluctuations and potentially lower annual returns.

Stocks on the list above that currently fall into this category include: Novan, Inc. (NOVN), Lilis Energy, Inc. (LLEX) and Pieris Pharmaceuticals (PIRS).

Third, the absence of more top value selection models including Piotroski-Graham enhanced and Forensic Positive portfolios that I model confirm some of the ongoing failures of fundamental stock selection across all of 2018. Considering alternative choices like momentum based and technical models may generate more positive returns in the short term.

This list is not the entirely comprehensive list from my top stock tracking board, but represents the top stocks through this point in time today.

What condition is the market in?

If these stocks can serve as sort of weekly barometer of market conditions, what condition is the market in?

I submit based on my ongoing research into the Fed QT activity, VIX anomaly, and patterns of the FANG+ stocks, that investors are currently keying on different variables like money flow, liquidity and volatility for market decisions. VIX Trading Patterns To Watch Closely Through The Fed's Asset Unwind Into 2019.

Those types of trading decisions reveal themselves in the $3.6 trillion proxy of the markets known as the NYSE FANG+ Index comprising 10 stocks: 10 stocks comprise the NYSE FANG+ Index: Apple (AAPL), Alibaba (BABA), Amazon (AMZN), Baidu (BIDU), Facebook (FB), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Netflix (NFLX), Nvidia (NVDA), Tesla (TSLA), and Twitter (TWTR).

(Source: FinViz) MicroSectors FANG+ -3X Invrs Lvrgd ETN (FNGD) (Source: FinViz) MicroSectors FANG+ 3X Leveraged ETN (FNGU)

These signals give us some potential indicators that we are returning to prior monthly patterns despite the recent change in tone from the Fed this week. The S&P 500 chart below shows the corresponding events of prior VIX volatility spikes that investors are anticipating and leveraging for gains through various momentum selections and ETFs.

It's my opinion that this reactive trading to current Federal Reserve QT activities that correlate strongly with VIX spike events is driving a meaningful component of the momentum stock selection. This behavior among investors also is delivering the best results so far into early January.

I will provide another update on this barometer later next week to see what the different stocks and portfolio types are delivering gains into a very volatile market.

Disclosure: I am/we are long TVIX, AMRN, MEET, PIRS. 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.