This article serves as a portfolio-based market barometer that shows which types of portfolio algorithms are outperforming from week to week. Leveraging different forensic, value, fundamental, momentum, and anomaly portfolios, we may be able to anticipate changes not only in market direction but also in different portfolio strategies that are beginning to take hold for better gains.
I don't know whether you read Kasparov's book, but he thinks that the ultimate chess player is not the machine, it's the machine with the man and his intuition using the machine that way. ~ Stanley Druckenmiller
Additionally, my momentum gauge model now provides a good time series for predicting inflection points in the market and momentum portfolios.
The Momentum Gauge above shows that we may be at another key inflection point and the composition below of the top stock portfolios may validate a change in portfolio selection model. 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 produced 12% 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 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|
|Forensic Negative Portfolio - November 2017||(NBY)||8.57%||46.60%||52.53%|
|Forensic Negative Portfolio - October 2017||NBY||8.57%||46.60%||52.53%|
|Bounce-Lag Momentum Week 49.2018||(EHTH)||7.37%||22.91%||46.54%|
|Forensic Negative Portfolio - April 2018||(VTVT)||20.07%||20.30%||207.55%|
|Breakout Stock Week 1.2018||VTVT||20.44%||20.30%||207.55%|
|Forensic Negative Portfolio - October 2018||(RIOT)||5.56%||20.00%||24.83%|
|Piotroski-Graham portfolio - July 2018||(DQ)||7.95%||19.32%||42.73%|
|Forensic Negative Portfolio - November 2017||(APEN)||4.16%||15.69%||11.90%|
|Breakout Stock Week 50.2018||(DHXM)||7.07%||15.22%||21.14%|
|Piotroski-Graham portfolio - May 2018||(TER)||15.88%||14.95%||21.06%|
|Piotroski-Graham portfolio - November 2017||TER||15.88%||14.95%||21.06%|
|Piotroski-Graham portfolio - October 2017||TER||15.88%||14.95%||21.06%|
|Breakout Stock Week 8.2018||(AKTS)||5.61%||14.03%||47.16%|
|Bounce-Lag Momentum Week 47.2018||(CDNA)||4.33%||12.98%||19.06%|
|Breakout Stock Week 20.2018||(ARTX)||5.68%||11.71%||31.72%|
|Breakout Stock Week 38.2018||(SITO)||5.79%||10.34%||45.45%|
|Piotroski-Graham portfolio - January 2019||(MU)||8.53%||9.68%||20.30%|
|Breakout Stock Week 34.2018||(CMCM)||3.75%||9.15%||7.96%|
|Breakout Stock Week 2.2018||(KEM)||8.37%||8.73%||12.57%|
|Russell 3000 Top 10 - July 2017||KEM||8.37%||8.73%||12.57%|
|Bounce-Lag Momentum Week 43.2018||(SILV)||3.79%||8.22%||20.51%|
|Breakout Stock Week 47.2018||(CAAP)||11.75%||8.15%||12.66%|
|Breakout Stock Week 39.2018||CAAP||11.75%||8.15%||12.66%|
|Breakout Stock Week 16.2018||(AEHR)||4.13%||7.55%||-22.97%|
|Russell 3000 Top 20 - July 2018||(CARG)||2.18%||7.50%||20.86%|
|Breakout Stock Week 10.2018||(ONCS)||5.74%||7.25%||21.31%|
|Forensic Positive Portfolio - October 2018||(IIPR)||3.37%||7.22%||27.19%|
|Bounce-Lag Momentum Week 2.2019||(INS)||2.67%||7.03%||87.83%|
|Bounce-Lag Momentum Week 4.2019||INS||2.67%||7.03%||87.83%|
|Breakout Stock Week 17.2018||(VSI)||4.46%||6.88%||-7.07%|
|Piotroski-Graham portfolio - January 2018||(NXPI)||7.26%||6.28%||17.19%|
|Breakout Stock Week 3.2019||(GNC)||6.03%||5.80%||28.63%|
Of the 25 stocks listed above from different active portfolios that delivered better than 5.80% this past week (through the writing of this article), five Forensic Negative stocks were in the top 10 along with the strongest showing of Piotroski-Graham value portfolios this month. This unusual mix indicates to me that the frothier negative forensic stocks and top value stocks are transitioning in a market that may be shifting more from momentum to value.
It also may reflect the condition of market health that still has not returned to a focus more 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.
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: eHealth, Inc., vTv Therapeutics Inc., DHX Media Ltd., Akoustis Technologies, Inc. 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: NovaBay Pharmaceuticals, Inc., vTv Therapeutics Inc., Riot Blockchain, Inc., and Apollo Endosurgery, Inc.
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 makeup of this top stock list for the week shows the changing transition of models and the possibility that the high representation of momentum stocks as a potential market reversal ahead. These results following on last week's article still 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: 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 VelocityShares Daily 2x VIX ST ETN (TVIX) chart below shows increasing volatility after a great low volatility run from December.
Go where the momentum takes you. Currently, we are seeing early confirmation across the portfolio barometer, momentum gauges, and key ETFs that the current rally is slowing. Early signs appear to show that investors are looking toward safety with stronger value and fundamental portfolio stocks.
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 am/we are long TVIX. 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.