This is a special contribution article by Prof. Grant Henning based on his published research on the BLM technical theory. The model, his trailing stop-loss approach, and comments are expressly based on his own proprietary methodology and forecasts.
Winning Bounce/Lag Momentum Stocks for Week 15 of 2019 (4/8-4/12)
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 buy all of these stocks nor to hold the stocks for an entire week. This is also why I often use trailing stop-loss orders throughout each trading day.
Performance of Last Week’s Picks
Last week’s five stock picks gained an overall average of 5.03% 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 2.68% 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 gained a total of 2.06%.
|Stock Pick - Week 14||Weekly Gain (Loss)||Weekly Gain(Loss) with 2% Stop-Loss*|
|Aeterna Zentaris Inc. (AEZS)||16.77%||17.42%|
|BioDelivery Sciences International, Inc. (BDSI)||(7.17%)||(0.75%)|
|NeoGenomics, Inc. (NEO)||2.15%||2.54%|
|CyberArk Software Ltd. (CYBR)||(3.39%)||0.39%|
*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. Several of you have accurately noted that some of the picks that trigger a stop-loss sell return to favor within a few days. Therefore, it can be more profitable at times to avoid stop-loss sales altogether. In my personal trading style, 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. Note that this just a matter of personal trading style, and it does not work well at all times for all persons.
Another reason for possibly 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 then capital preservation becomes a more serious issue than with picks made using other trading strategies.
Comparative BLM/S&P 500 Performance through 14 Weeks of 2019
Bounce/Lag Momentum +55.33% YTD
As you can see in the above chart, where the vertical y-ordinate represents percentage gain and the horizontal x-axis depicts number of weeks, the Bounce/Lag Momentum stock picks have more than tripled the performance of the S&P5 00 Index. BLM 14-week composite gains of 55.33% compare favorably with S&P 500 composite gains of 15.39% and have exceeded my strategic objective of 10% per month. While past performance is no guarantee of future gains, I remain optimistic going forward.
For those with the temerity to trade these stocks on margin, I estimate year-to-date gains of 128% fully margined, to the extent that these stocks were marginable. Note that I do not advocate trading these particular stocks on margin.
A Look at Next Week’s B/L Momentum Picks
For next week, the BLM algorithm has identified the following five picks: VCYT, AEZS, BDSI, NEO, and CYBR. VCYT is a returning pick from last week, when it was the only pick with a qualifying BLM score above 30. Note that a BLM score above 30 is normally required to qualify as a weekly pick. The following table reports actual BLM scores and combined rankings for these stocks.
|Stock Pick - Week 15||B/LM Score||Combined Ranking|
|SharpSpring, Inc. (SHSP)||34.99||2|
|The Joint Corp. (JYNT)||31.52||3|
|Aeterna Zentaris Inc.||29.86||4|
|Intelligent Systems Corp. (INS)||29.05||5|
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.
Veracyte, Inc. is a genomic diagnostics company. The Company uses genomic technology to resolve diagnostic ambiguity. It targets diseases in which patients undergo invasive diagnostic procedures. Its products combine genomic technology, clinical science, and machine learning. The Company commercializes over three genomic tests, which are transforming the diagnosis of thyroid cancer, lung cancer, and idiopathic pulmonary fibrosis. Its commercial solution, the Afirma Thyroid fine needle aspiration Analysis, centers on the Afirma Gene Expression Classifier. The Afirma GEC is offered directly or as part of a solution that also includes cytopathology. The Company also operates in the pulmonology diagnostics market, offering Percepta Bronchial Genomic Classifier, a genomic test to resolve ambiguity in lung cancer diagnosis. It also offers the Envisia Genomic Classifier, which is designed to help in the assessment of patients suspected to have idiopathic pulmonary fibrosis.
SharpSpring, Inc. is a cloud-based marketing technology company. The Company offers SharpSpring, a marketing automation solution for small and medium-sized businesses, and is primarily sold to marketing agencies that use the platform on behalf of their clients. The features of SharpSpring includes Web tracking, lead scoring, and automated workflow that enables businesses deliver the message to the customer. SharpSpring marketing automation solution also offers customer relation management tool and call tracking functionality. Its SharpSpring Mail+ provides customers with marketing automation functionality and traditional email marketing capabilities. SharpSpring Mail+ offers tools such as automated workflows, triggered emails, and dynamic list segmentation. The Company’s subsidiaries include SharpSpring Technologies, Inc., InterInbox SA, and ERNEPH 2012A Ltd. doing business as ISMS, Quattro Hosting LLC, SMTP Holdings S.a.r.l., and InterCloud Ltd.
The Joint Corp. develops, owns, operates, supports, and manages chiropractic clinics through direct ownership, management arrangements, franchising, and the sale of regional developer rights throughout the United States. The Company is franchisor and operator of chiropractic clinics. It offers patients the opportunity to visit its clinics without an appointment and receive prompt attention. The Company has over 425 franchised, company-owned, or managed clinics in operation in over 30 states. In addition to its operating clinics, the Company has granted franchises either directly or through its regional developers for an additional over 170 clinics. It offers a range of membership and wellness packages. Each patient's records are digitally updated for ready retrieval in its data storage system by its chiropractors in compliance with various applicable medical records security and privacy regulations.
Aeterna Zentaris Inc. is a specialty biopharmaceutical company engaged in developing and commercializing treatments in oncology, endocrinology, and women's health. It operates through the biopharmaceutical segment. The Company is engaged in drug development activities and in the promotion of products for others. Its principal product candidates are Zoptrex (zoptarelin doxorubicin) and Macrilen (macimorelin) in oncology and endocrinology respectively. It focuses on its product candidates Zoptrex and Macrilen, which are in Phase III clinical development, and on a luteinizing hormone-releasing hormone (LHRH)-disorazol Z conjugate (AEZS-138), which is in pre-clinical development in oncology and is available for partnering. The Company's direct and indirect subsidiaries include AEZS GmbH, Zentaris IVF GmbH, and Aeterna Zentaris, Inc.
Intelligent Systems Corporation is engaged in the business of providing technology solutions and processing services to the financial technology and services market. The Company's financial transaction solutions and services (FinTech) operations are conducted through its CoreCard Software, Inc. (CoreCard) subsidiary. CoreCard and its affiliate companies in Romania and India, as well as the corporate office, provide administrative, human resources, and executive management support. The Company also has two subsidiaries, CoreCard SRL in Romania and ISC Software in India, that perform software development and testing, as well as processing operations support for CoreCard. CoreCard designs, develops, and markets a suite of software solutions to accounts receivable businesses, financial institutions, retailers, and processors to manage their credit and debit cards, prepaid cards, private label cards, fleet cards, loyalty programs, and accounts receivable and small loan transactions.
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. These stocks also tend to be fully marginable, which means that it is possible to leverage gains by a factor of approximately 3.3. Dow 30 stocks also offer opportunities for options traders. Traditionally, however, I have avoided these stocks because they do not usually produce my targeted 10% monthly growth. Recently, however, there have been some exceptions - particularly through discreet application of margin trading.
Last week’s Dow 30 picks had mixed performance based on sector trends and company idiosyncrasies. Cisco Systems (CSCO) gained 3.56% on the week (counting a dividend distribution). If your position was fully margined, this would produce gains of 11.75%. Procter & Gamble (PG) lost 0.38%, while Visa (V) lost 0.95%.
My Dow 30 picks for next week are Cisco Systems, Visa (V), and Microsoft (MSFT). The rationale for their selection is as follows. These three stocks were found to rank highest of the Dow 30 stocks in a six-index combined-ranks analysis. The indexes included momentum, value, and growth factors.
Although these stocks tend to fall short of my 10% monthly growth target, they do have some safety advantages for the long term. Also, they can be margined to make up the comparative differences with other stocks.
Leveraging and Comparing Next Week’s ETF Picks
So far this year, we have seen remarkable gains by Bounce Lag Momentum picks, by leveraged Dow 30 picks, and now we will look at gains possible through exchange-traded ultra funds (ETFs). If we are looking for quarterly gains in excess of 100%, it does not appear to me that we can reach that goal without some form of leveraging. Let’s compare what we have seen to be possible in the first quarter of 2019. The following table reports the best results by the BLM method, the Dow 30 method, and by using Ultra ETFs.
|Source||2019 % Gain||Margined/Leveraged 2019 % Gains|
|Average BLM Picks||55.33||127.81|
|Dow 30 Picks*|
*Note that these percentages for Dow 30 stocks do not include dividend payments, which could, when leveraged, add another 5-10%. Note also that ULTRA ETFs are by nature leveraged.
The implication of the above table is that ultra ETFs probably provide the greatest return for the least hassle. Based on this information, my ETF picks for next week are the Direxion Daily S&P Biotech Bull 3X Shares ETF (LABU), the VelocityShares 3x Long Crude ETN (UWT), the ProShares UltraPro 3x Crude Oil ETF (OILU), and the Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares ETF (UBOT).
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.
If you have any further questions about the Bounce/Lag Momentum stock-selection procedure, you can probably find the answers in my books referenced below.
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 is 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 am/we are long LABU. 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.