Momentum Strategies That Continue To Dominate Through January

by: JD Henning

Momentum continues to dominate the sample of Fundamental, Forensic, Value, and Anomaly portfolio strategies into 2019 that I track from published financial 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.

So far, into January, my 20 stock Premium Portfolio is up more than 15% heavily weighted toward momentum stocks based on the model's selection preferences.

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

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 15% gains through January. These gains again 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 since last year. This article also expands on last week's results as to 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 sustains strong price movements, portfolio strategies may also experience similar sustaining effects.

Not only are these some of my top performing stocks from this week but the concentrations of portfolio type also may provide meaningful support to future return behavior. This list forms a type of market barometer that may signal what selection strategies are working best.

Weekly - Top Performing Stocks from all the Active Portfolios * live updates
Portfolio Symbol Current Weekly Monthly
Piotroski-Graham portfolio - May 2018 (VHI) 7.41% 48.92% 82.98%
Piotroski-Graham portfolio - March 2018 VHI 7.41% 48.92% 82.98%
Forensic Negative Portfolio - November 2017 (OTC:ARDM) 9.59% 46.34% 50.00%
Breakout Stock Week 25.2018 (TYME) 10.29% 39.26% 10.91%
Breakout Stock Week 26.2018 (CLSN) 9.43% 28.18% 40.61%
Breakout Stock Week 37.2018 (ENZ) 4.57% 22.74% 35.93%
Breakout Stock Week 26.2018 (ATTU) 8.32% 22.48% 27.69%
Forensic Negative Portfolio - April 2018 (NYMX) 9.74% 22.29% 48.61%
Forensic Negative Portfolio - October 2017 NYMX 9.74% 22.29% 48.61%
Forensic Negative Portfolio - September 2017 NYMX 9.74% 22.29% 48.61%
Breakout Stock Week 3.2019 (EXPI) 4.90% 20.83% 21.66%
Breakout Stock Week 30.2018 EXPI 4.90% 20.83% 21.66%
Forensic Negative Portfolio - December 2017 (MHLD) 16.41% 18.25% 3.47%
Breakout Stock Week 15.2018 MHLD 17.19% 18.25% 3.47%
Breakout Stock Week 31.2018 (SRAX) 5.73% 17.87% 18.88%
Forensic Negative Portfolio - December 2017 (TIS) 4.76% 16.81% 26.92%
Breakout Stock Week 29.2018 (ACHN) 9.30% 14.08% 20.51%
Breakout Stock Week 18.2018 (SPHS) 10.70% 13.33% 11.21%
Breakout Stock Week 49.2018 (ADMP) 7.60% 12.70% 14.98%
Breakout Stock Week 37.2018 ADMP 7.60% 12.70% 14.98%
Breakout Stock Week 11.2018 ADMP 7.60% 12.70% 14.98%
Breakout Stock Week 19.2018 (GEOS) 5.04% 11.80% 9.04%
Breakout Stock Week 49.2018 (EYPT) 6.73% 11.71% 11.71%
Breakout Stock Week 45.2018 EYPT 6.73% 11.71% 11.71%
Breakout Stock Week 35.2018 (MNOV) 4.07% 11.33% 13.43%
Breakout Stock Week 3.2018 (CSLT) 5.24% 11.06% 23.70%
Forensic Positive Portfolio - November 2017 (VLRS) 1.75% 10.87% 39.56%
Breakout Stock Week 22.2018 (AEZS) 5.28% 10.09% 40.96%
Forensic Positive Portfolio - June 2018 (CBMG) 8.64% 10.07% 9.77%
Piotroski-Graham portfolio - May 2018 (EVC) 3.08% 8.88% 34.80%
Breakout Stock Week 4.2018 (AGEN) 13.48% 8.73% 77.83%
Piotroski-Graham portfolio - January 2018 (PAR) 3.21% 8.52% 26.16%
Russell 3000 Top 10 - July 2018 (EGAN) 2.39% 8.35% 12.19%
Russell 3000 Top 10 - July 2018 (NES) 3.39% 8.00% 29.50%

Of the 25 stocks listed above from different active portfolios that delivered better than 8% this past week (through the writing of this article), only seven stocks, Valhi, eGain Corporation, Nuverra Environmental Solutions, Inc., Controladora Vuela Compania de Aviacion, S.A.B. de C.V., Cellular Biomedicine Group, Inc., Entravision Communications Corporation, and PAR Technology Corporation did not come from either a Forensic Negative or Momentum-based stock portfolio. This tells me that the market is continuing to heavily discount or disregard 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?

Expanding from the Bernstein analysis chart below, I added some theoretical ranges of stock selection models that I am continuing to test. The possibility exists that momentum stock selection is the most effective strategy during high volatility "frothy market" periods where standard fundamental and value models are unable to differentiate from market indexes.

This is a working theory that I continue to test with my stock portfolio barometer across the different models from the financial literature to see what develops. The overly generalized organization of stock portfolio performance into 3 categories (frothy, stable, oversold) serves mainly to help explain my observation that fundamental selection models increasingly failed to deliver differentiated market returns throughout 2018: Funds And Fundamentals Breaking Down: What Are Your Best Alternatives For 2019?

This supports the Bernstein analysis charted above of high vs. low momentum stocks by sector P/E levels and the possibility we are nearing a correction back toward fundamental strategies. We know that fundamental models work very well during stable markets with rational valuations and a lack of central bank external effects to alter market liquidity conditions.

Explaining the Table of Stocks by Portfolio

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: Tyme Technologies, Inc., Attunity Ltd., eXp World Holdings, Inc., Celsion Corporation, 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: Aradigm Corporation, Nymox Pharmaceutical Corporation, Maiden Holdings, Ltd., and Orchids Paper Products Company.

Third, the stocks from portfolios highlighted in red come from the different Russell Index Anomaly portfolios that try to exploit the annual index reconstitution effects documented in the literature. These stocks by design are small- to mid-cap stocks with potential for high momentum volatility, but not necessarily selected for momentum characteristics over fundamental and value-based criteria.

Finally, the absence of more top value selection models including Piotroski-Graham enhanced and Forensic Positive portfolios (shown in grey and blue) that I model, confirm some of the ongoing failures of fundamental stock selection across all of 2018. These results following on last week's article support the continuation of momentum and technical models to 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 (GOOG) (GOOGL), Netflix (NFLX), Nvidia (NVDA), Tesla (TSLA), and Twitter (TWTR).

The latest update is as follows:

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

(Source: FinViz) MicroSectors FANG+ 3X Leveraged ETN (FNGU)

The S&P 500 ETF (SPY) chart below shows that the expected $20.1B asset roll-off scheduled this week has not deterred a retest of the 50-day moving average for the first time in January. Conditions could turn much more positive with a successful breakout after tests in November and December failed to break this critical resistance level.

Go where the momentum takes you. Currently, we are seeing very positive conditions of the January Effect extending through the month and recovery from December lows that have not yet abated.

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

All the best!


Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.