This is a special contribution article by Prof. Grant Henning based on his published research on the BLM technical theory. The model and comments are expressly based on his own proprietary methodology and forecasts.
Winning Bounce/Lag Momentum Stocks for Week 8 of 2019
The Bounce/Lag Momentum algorithm continues to be an effective stock-picking guide. Bear in mind, however, that there is much more to successful trading than merely picking good stocks. I suspect that finding good stocks is only about 40% of possible success in equities trading. The remaining 60% is determined by money management and capital preservation.
Decisions about entry and exit points and how long to hold a position are especially important. In today’s volatile marketplace, “buy-and-hold” strategies are unlikely to be successful. Therefore, although I am offering weekly stock picks, this should not be interpreted as a recommendation necessarily to hold stocks for an entire week. This is also why I recommend trailing stop-loss orders throughout each trading day.
Overall Market Conditions
In spite of improved posturing by the Fed, market conditions remain challenging. This past week, the S&P 500 Index rose strongly to register a 2.50% gain for the week. You can tell from the chart below that the past three times that this index has crossed its 200-day moving average, it has initiated a downward plunge. It could very well be about to repeat that same pattern. Furthermore, unlike last week, the money flow index (72.60) has again risen above the relative strength index (69.01), which I take to suggest that there is likely a downward correction ahead in the near term.
Performance of Last Week’s Picks
Last week’s five stock picks gained an overall average of 5.62% on the week. However, as the table below illustrates, this positive performance was possible only by using 2% trailing stop-loss orders. Otherwise, the overall averages showed a gain of only 3.81% for the week. This underscores the need for a well-defined exit strategy in order to be successful. During the same week, the S&P 500 Index gained a total of 2.50%.
|Stock Symbol||Weekly Gain (Loss)||Weekly Gain(Loss) with 2% Stop-Loss*|
|Twilio Inc. (TWLO)||(6.94%)||1.60%|
|3Pea International, Inc. (OTC:TPNL)||9.30%||10.42%|
|PCM, Inc. (PCMI)||12.20%||12.20%|
|Okta, Inc. (OKTA)||1.90%||1.90%|
|MongoDB, Inc. (MDB)||1.98%||1.98%|
*A word is needed about the use of stop-loss orders. Formal stop-loss orders provide a temptation to market makers to “take out the stops” when there is little trading volume. Therefore, it is often better to set a mental sell price and execute it when the market reaches that point. Also, I never leave stop-loss orders overnight because they may be executed without good reason. You can see from the table that two of the five stock picks for last week (TWLO and TPNL) were positively affected by this stop-loss-setting procedure. Thus, setting a 2% mental stop-loss order for those stocks made the difference between finishing the week with a 3.81% average gain and a 5.62% average gain.
Another argument in favor of using stop-loss orders for these picks is that they all have already had big momentum moves and are somewhat “long in the tooth.” The BLM method identifies stocks with positive momentum only after they approach their 52-week highs. Thus, they are often vulnerable to sudden downturns, and capital preservation becomes a more serious issue than with picks made using other trading strategies.
Comparative BLM/S&P Performance through 7 Weeks of 2019
Bounce/Lag Return %
S&P 500 Return %
As you can see in the above table and chart, where the vertical y-axis represents percentage gain and the horizontal x-axis depicts number of weeks, the Bounce/Lag Momentum stock picks have more than doubled the performance of the S&P 500 Index through the first seven weeks of 2019. Cumulative gains of 25.42% in six weeks exceeds my strategic objective of 10% per month. While past performance is no guarantee of future gains, I remain highly optimistic going forward.
A Look at Next Week’s BLM Picks
For next week, the BLM algorithm has identified the following five picks along with their respective BLM scores:
- Tandem Diabetes Care, Inc. (TNDM) (272)
- PCM, Inc. (PCMI) (72)
- Gol Linhas Aereas Inteligentes SA (GOL) (70)
- 3Pea International, Inc. (OTC:TPNL) (86)
- The Rubicon Project, Inc. (RUBI) (54)
Some of these stocks were picks in previous weeks. The BLM strategy attempts to take advantage of fractal gains. Thus, stocks from previous weeks often reappear when technical considerations so dictate. Note that a BLM score above 30 is required to qualify as a weekly pick, but in challenging market conditions, I tend to favor only the two or three stocks with highest BLM scores.
You can see from the following charts that all of these stocks are experiencing upward momentum surges and are reaching new annual price highs. However, it is precisely for those same reasons that extreme caution is warranted in each case.
Tandem Diabetes Care, Inc. is a medical device company. The company is engaged in designing, developing, and commercializing products for people with insulin-dependent diabetes. The company manufactures and sells three insulin pump products, which include t:slim Insulin Delivery System (t:SLIM), t:flex Insulin Delivery System (t:FLEX) and t:slim G4 Insulin Delivery System (t:slim G4). Its technology platform features Micro-Delivery Technology, a miniaturized pumping mechanism, which draws insulin from a flexible bag within the pump's cartridge rather than relying on a syringe and plunger mechanism. It also features a software, which is a vivid color touch screen and a micro- universal serial bus (USB) connection that supports both a rechargeable battery and uploads to t:connect Diabetes Management Application (t:connect), its custom cloud-based data management application that provides display therapy management data from the pump and supported blood glucose meters.
Note that TNDM has by far the highest BLM score of this week’s picks (272). Its most recent analyst rating (2/15/19) is a positive “Long” by MarketEdge. It has had an 80% quarter-over-quarter earnings gain. Its share price has experienced a 1960% gain over the past 52 weeks, and it now appears poised to resume that upward momentum. It has recently experienced a positive MACD crossover pattern, and its relative strength (73.63) now exceeds its money flow (70.27) - a near-term positive.
PCM, Inc. is a multi-vendor provider of technology solutions, including hardware products, software and services, offered through its dedicated sales force, field and internal service teams, direct marketing channels, and owned and operated data centers. The company's segments include Commercial, Public Sector, Canada, and United Kingdom. The Commercial segment sells complex technology solutions to commercial businesses in the United States. The Public Sector segment consists of sales made to federal, state and local governments, as well as educational institutions. The Public Sector segment utilizes a phone and field relationship-based selling model, as well as contract and bid business development teams and an online extranet. The Canada segment consists of sales made to customers in the Canadian market. Its United Kingdom segment consist its subsidiary, PCM Technology Solutions UK, Ltd., which serves as its hub for the United Kingdom and the rest of Europe.
PCMI currently has a continuing high BLM score of 72. It has had quarter-over-quarter earnings growth of 882%. Its share price has gained 316% on the year. Although trading volume continues to be high, this stock warrants caution after the recent run-up in price. It has had four different positive analyst upgrades in the past two weeks.
Gol Linhas Aereas Inteligentes SA is a Brazil-based airline that provides scheduled air transportation for passengers and cargo throughout Brazil and across Latin America. The company operates through two segments: Air transportation and Loyalty program. The Air transportation segment operations originate from its subsidiary Gol Linhas Aereas SA (GLA) for the provision of air transportation services. GLA offers customers flights to more than 60 destinations in approximately 10 countries in South America and the Caribbean. GOLLOG is the company's cargo transportation and logistics business serving more than 2,400 Brazilian municipalities and, through partners, more than 200 international destinations in over 90 countries. The company's fleet includes approximately 120 Boeing 737 aircrafts. The Loyalty program segment operations are represented by the SMILES coalition loyalty program, which enables clients to accumulate miles and redeem tickets for more than 700 locations worldwide.
GOL has a strong positive BLM score of 70. It has experienced a positive MACD crossover pattern as of the beginning of February. It has received two positive analyst upgrades in the past month. However, its quarter-over-quarter earnings are down 224%. This is clearly one of those stocks that are benefiting from the improving political climate in Brazil.
3PEA International, Inc. is a payment solutions company providing prepaid card programs and processing services for corporate, consumer, and government applications. The company focuses on the evaluation of payment terminal software and hardware technology. It markets prepaid debit card solutions under its PaySign brand. The company is engaged in the development of a secure payment gateway and hardware device, which utilizes encryption technology and secure key exchange to facilitate personal identification number (PIN) debit transactions over the Internet. Its products and services include The PaySign Brand; Incentive Rewards; Source Plasma Donor Payments; Pharmaceutical Market, which includes PaySign Co-Pay Assistance, and Buy and Bill, and other products, such as Survey Instant Rewards. Through its PaySign platform, it provides various services, including transaction processing, cardholder enrollment, value loading, cardholder account management, reporting and customer service.
TPNL has the second highest BLM score currently available (86). It is experiencing a recent volume surge and a positive MACD histogram pattern. Its relative strength of 79.82 is slightly higher than its money flow of 76.70, which tells us that it may still have room to run higher. It has experienced a 53% quarter-over-quarter earnings increase, and its share price has risen 846% in the past 52 weeks. It has received two positive analyst upgrades in the past month.
The Rubicon Project, Inc. offers a technology solution to automate the purchase and sale of advertising for buyers and sellers. The company's solution enables buyers and sellers to purchase and sell a range of advertising units, including display and video; utilizing various inventory types, including direct sale of inventory and real-time bidding (RTB), and across digital channels, including mobile web, mobile application, and desktop, as well as across various out of home channels, such as digital billboards. The company's platform features applications for digital advertising sellers, including websites, mobile applications and other digital media properties, to sell their advertising inventory; applications and services for buyers, including advertisers, agencies, agency trading desks (ATDs), demand side platforms (DSPs) and advertisement networks, to buy advertising inventory, and a marketplace over which such transactions are executed.
RUBI has a positive BLM score of 54. It has received two positive analyst upgrades in the past month. It has experienced 87% most recent quarter-over-quarter earnings growth, and its share price has gained 186% on the year. Its money flow index (82.26) currently exceeds its relative strength index (70.80), which may be problematic in the near term.
If you have any further questions about the Bounce/Lag Momentum stock-selection procedure, you can probably find the answers in my books, The Value and Momentum Trader: Dynamic Stock Selection Models to Beat the Market (2010) and Trading Stocks by the Numbers; Financial Engineering for Profit (2015), both available at Amazon.com.
Best wishes in your trading decisions.
Professor Grant Henning, Ph.D. (Ret)
My last article is available at the link below, and each set of weekly stock selections are updated on the live tracking spreadsheets and V&M Dashboard available to members under the Tools section.
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.