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 11 of 2019
The Bounce/Lag Momentum algorithm continues to be an effective stock-picking guide. It is essentially a numerical derivative of the ratio of the percentage bounce from the 52-week low to the percentage lag from the 52-week high. As such, it is a sensitive positive momentum measure that works well to identify stocks that are at the upper half of their momentum trajectory. 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 often recommend trailing stop-loss orders throughout each trading day.
Overall Market Conditions
Due possibly to improved posturing by the Fed, hints of a trade deal with China, and sharp declines of last week, market conditions appear to be improving for next week. Three weeks ago, for the S&P 500 Index, the ratio of relative strength over money flow was only 0.96, where values below 1.00 are considered a portent of negative conditions. For next week that ratio has risen to 1.37, which is the highest in many weeks. I take this to be a positive indicator for the near term. In addition, the modestly long-tail-down candlestick pattern suggests that an upward trend is still in place.
This past week, the S&P 500 Index fell 2.16% for the week. You can see from the chart below that the S&P 500 Index has again dropped below its 200-day moving average. The money flow index value of 36.05 shows that the index is approaching a region where sharp upward bounces may be expected.
Performance Of Last Week’s Picks
Last week’s five stock picks gained an overall average of 3.51% 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 1.69% for the week. This underscores the need for a well-defined exit strategy in order to maximize success. During the same week, the S&P 500 Index lost a total of 2.16%.
|Stock Symbol||Weekly Gain (Loss)||Weekly Gain (Loss) with 2% Stop-Loss*|
|Tandem Diabetes Care, Inc. (TNDM)||(6.82%)||(3.06%)|
|NanoString Technologies, Inc. (NSTG)||9.77%||9.77%|
|Twilio Inc. (TWLO)||(5.45%)||(0.10%)|
|CareDx, Inc (CDNA)||7.96%||7.96%|
|the Rubicon Project, Inc. (RUBI)||3.00%||3.00%|
*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. Some of you have accurately noted that some of these picks that trigger a stop-loss sell return to favor within a few days. Therefore, it can be more profitable to avoid stop-loss sales altogether. I tend to err on the side of caution by preferring to suffer a small loss and to repurchase the same stock later than to suffer a large loss if the stock falls and does not return.
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 500 Performance Through 10 Weeks Of 2019
B/L Momentum +37.75% YTD
As you can see in the above table and chart, where the vertical y-ordinate represents percentage gain and the horizontal x-axis depicts number of weeks, the Bounce/Lag Momentum stock picks more than tripled the performance of the S&P 500 Index. BLM average gains of 37.75% in ten weeks have exceeded my strategic objective of 10% per month. While past performance is no guarantee of future gains, I remain optimistic going forward.
Obviously, I am not troubled by the seemingly high turnover rate occasioned by the use of stop-loss orders. An untold secret is that the proceeds from the early sale of those stocks can be applied elsewhere to produce gains not reflected in my cumulative-gains statistics.
A Look At Next Week’s BLM Picks
For next week, the BLM algorithm has identified the following five picks: Ra Pharmaceuticals, Inc. (NASDAQ:RARX), LiveRamp Holdings, Inc. (NYSE:RAMP), Gravity Co., Ltd. (NASDAQ:GRVY), XBiotech Inc. (NASDAQ:XBIT), NanoString Technologies, Inc. (NASDAQ:NSTG). One of these stocks, NSTG was a pick for last week also. 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 still 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. The following table summarizes information on these picks and their corresponding BLM scores.
|Stock Pick||Bounce/Lag Momentum Score|
|Ra Pharmaceuticals, Inc.||88.60|
|LiveRamp Holdings, Inc.||43.00|
|Gravity Co., Ltd.||51.44|
|NanoString Technologies, Inc.||54.07|
Charts of all of these picks are available below. 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.
Ra Pharmaceuticals, Inc. is a clinical-stage biopharmaceutical company. The Company is focused on developing therapeutics for the treatment of serious diseases that are caused by excessive or uncontrolled activation of the complement system. It is developing its lead product candidate, RA101495, a self-administered subcutaneous injection. RA101495 is injected into the tissue under the skin for the treatment of paroxysmal nocturnal hemoglobinuria (PNH).
The Company is also developing RA101495 to treat other debilitating complement-mediated diseases such as generalized myasthenia gravis (gMG) and lupus nephritis. It also focuses on discovery and preclinical programs targeting selective inhibition of other uncontrolled complement pathway factors to treat a variety of ophthalmic, renal and inflammatory diseases. The Company uses its Extreme Diversity platform, macrocyclic peptide chemistry technology which produces synthetic macrocyclic peptides.
LiveRamp Holdings, Inc. is a software as a service company that provides identity platform. The Company’s platform connects people, data and devices across the digital and physical world. It provides LiveRamp IdentityLink, which is an identity resolution service that ties data back to people and allows to onboard that data for people-based marketing initiatives across digital channels. Its IdentityLink serves brands and agencies, marketing technology providers, data owners and publishers.
Its identity resolution service allows AbiliTec and identity graph to link all offline and online identifiers to a consumer. IdentityLink resolves first-party offline customer relationship management, direct marketing and point-of-sale data back to a consumer identifier. Its graph matches personally identifiable information-based data, such as e-mails, postal addresses and phone numbers with identifiers.
Gravity Co., Ltd. is a developer, distributor and publisher of online games in Japan and Taiwan. The Company's segments include online games, mobile games and other. Its principal product includes Ragnarok Online, which is a multiplayer online role-playing game. It categorizes products into over three categories, such as online games; mobile games and applications, and other games and game-related products and services, including character-based merchandise and animation. It offers over five online games, such as Ragnarok Online, Ragnarok Online II, Requiem, Dragonica (Dragon Saga) and R.O.S.E. Online, which are action adventure massively multiplayer online role-playing games (MMORPG). It develops mobile games, including Ragnarok Online-Uprising: Valkyrie, Ragnarok Online Mobile Story and Ragnarok Violet, and also publishes mobile games licensed from third parties. It provides games for game consoles and handheld game consoles, such as Nintendo DS, Xbox 360 and the PlayStation series.
XBiotech Inc. is a clinical-stage biopharmaceutical company. The Company is engaged in discovering and developing True Human monoclonal antibodies for treating a range of different diseases. It focuses on its lead product candidate, Xilonix (MABp1), which is derived from a natural human immune response. The Company has also developed a True Human monoclonal antibody discovery platform and manufacturing system. Xilonix is a therapeutic antibody, which specifically neutralizes interleukin-1 alpha (IL-1a).
Its pipeline includes various human antibodies for treating diseases, such as cancer, vascular disease, inflammatory skin disease and diabetes. The Company has completed a Phase III study in Europe for the treatment of symptomatic colorectal cancer. It also investigated its lead product candidate in clinical trials for other inflammatory conditions, including vascular disease, type II diabetes, acne, psoriasis, pyoderma gangrenosum and hidradenitis suppurativa.
NanoString Technologies, Inc. develops, manufactures and sells intuitive products that unlock scientifically valuable and clinically actionable biologic information from minute amounts of tissue. The Company is engaged in the development, manufacture and commercialization of instruments, consumables and services for profiling the activity of hundreds of genes and proteins simultaneously from a single tissue sample. The Company's nCounter Analysis System is an automated, multi-application, digital detection and counting system, which directly profiles hundreds of molecules simultaneously using a barcoding technology.
The Company markets systems and related consumables to researchers in academic, government and biopharmaceutical laboratories for use in understanding fundamental biology and the molecular basis of diseases, such as cancer, and to clinical laboratories and medical centers for diagnostic use.
DOW 30 Picks
Many readers are especially interested in large-cap, low-risk DOW 30 stocks that experience low volatility and may also pay dividends. Traditionally, I have avoided these stocks because they do not usually produce my targeted 10% monthly growth. However, I was amazed this past week to discover that this is not always the case. Also, it is apparent that there are safety advantages in popular large-cap stocks during periods of market volatility and potential downturns. However, you can see that most Dow 30 stocks experienced significant downturns this past week inasmuch as these stocks are highly correlated with overall market performance.
My two Dow 30 picks for next week and the accompanying rationale for their choice follow below:
Merck (MRK) currently has the highest momentum residual (0.265) of all of the Dow 30 stocks. It also has the highest percentage bounce off its 52-week low (51.2%). Added to this, it has among the highest relative strength values (54.31) of the Dow 30 stocks. Importantly, its money flow index (48.71) is currently below its relative strength index, and this often points to near-term growth. Similarly the candlestick chart below shows a long-tail-down pattern that is often indicative of a positive move in share price.
Boeing (BA) has exceeded all other Dow 30 stocks by realizing year-to-date gains of 24.14%. In addition, BA has the second-best momentum residual of all Dow 30 stocks (0.216). Furthermore, it has the second-best upward trajectory, showing a 44.6% bounce above its 52-week low. Its relative strength of 60.6 is about the highest of all Dow 30 stocks, and the fact that its money flow index (51.32) is positioned well below its relative strength suggests that it still has upward room to run. For these reasons and others, BA is currently the second-favorite Dow 30 stock, and it was my favorite last week.
Although the BLM algorithm is a proprietary analytical procedure that is the end result of years of statistical analysis, much of its conceptual design is described in my books listed below. However, it currently involves the maintaining of a 100-column spreadsheet with daily updates including inputs from an AI expert system and a regression residual analysis. Use is made of rank statistics in the belief that a trader should not only find good stocks, but should also have a means of comparative ranking of those stocks. Computations proceed throughout each trading day, but these results are posted weekly through this medium.
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.
The Value and Momentum Trader: Dynamic Stock Selection Models to Beat the Market (2010)
Trading Stocks by the Numbers; Financial Engineering for Profit (2015)
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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.