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 in the references below.
Winning Bounce/Lag Momentum Stocks for Week 19 of 2019 (5/6-5/10)
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. Because they are often well into their momentum cycle, it is necessary to watch them closely for sudden reversals. Stop-loss orders may be useful for this purpose. On average, however, these stocks continue to show upward momentum.
Bear in mind 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.
In these updates, I explore opportunities in three areas: individual small-cap stocks, leveraged Dow 30 stocks, and leveraged exchange-traded funds. This is analogous to fishing for the largest fish in three adjacent ponds simultaneously. This past week, leveraged Dow 30 stocks afforded the best returns of these three approaches, with the lowest portfolio turnover.
Performance of Last Week's Picks
Last week's five stock picks gained an overall average of 4.95% 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 2.09% 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 0.20%.
|Stock Pick - Week 18||Weekly Gain (Loss)|| |
Weekly Gain(Loss) with 2% Stop-Loss*
|Axsome Therapeutics, Inc. (AXSM)||1.70%||1.80%|
|The Trade Desk, Inc. (TTD)||7.77%||7.77%|
|Coda Octopus Group, Inc. (CODA)||8.92%||8.92%|
|Fluent, Inc. (FLNT)||4.64%||5.50%|
*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. For this reason, 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 is 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. The Dow 30 stocks, as reported below, tend to be less volatile than the picks reported above. Thus, there is less need to use trailing stop-loss orders with them and, consequently, they involve less portfolio turnover.
Comparative BLM/S&P 500 Performance through 18 Weeks of 2019
Bounce/Lag Momentum +67.79% 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&P 500 Index. BLM 17-week composite gains of 67.79% compare favorably with S&P 500 composite gains of 18.22% 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 156% when fully margined, to the extent that these stocks were marginal. However, note that, unlike Dow 30 stocks, I do not advocate trading these particular stocks on margin because they tend to be too volatile.
Next Week's Market Conditions
Last week was somewhat challenging for momentum stocks, but for next week, conditions appear to have improved significantly. Last week, no stocks were found by the BLM algorithm to exceed the critical BLM score of 30. For this coming week, eight stocks were found to exceed that critical value, the top five of which are reported below. One additional way to gauge market conditions is to examine the ratio of the relative strength index RSI to the money flow index MFI for a major index of interest. Values above one suggest a positive outlook; whereas, values below one imply negativity. As you can see in the following chart for the S&P 500 Index, the RSI Index now stands at 66.67, but the MFI Index is at a lower value of 48.1. The ratio 66.67/48.1 is 1.385, which is above 1.00. This is an improvement over last week's ratio of 1.139. Therefore, I look for more upward market movement in the coming week.
A Look at Next Week's BLM Picks
For next week, because of improved conditions for momentum stocks, the BLM algorithm has again identified eight stocks with a qualifying BLM score above 30, from among over 5,000 stocks examined. Recall that a BLM score above 30 is normally required to qualify as a weekly pick. Although eight stocks were found to qualify as BLM picks, I am reporting only the five highest scoring stocks in the table below along with each stock's BLM score and relative ranking. Note that the top three picks are returning from last week because of continuing high momentum ranking.
|Stock Pick - Week 19||B/LM Score||Combined Ranking|
|Axsome Therapeutics, Inc. (AXSM)||84.63||1|
|The Trade Desk, Inc. (TTD)||75.91||2|
|Coda Octopus Group, Inc. (CODA)||73.29||3|
|Enphase Energy, Inc. (ENPH)||53.37||4|
|Catalyst Pharmaceuticals, Inc (CPRX)||44.09||5|
Charts of each 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 these same reasons that extreme caution is warranted in each case.
Axsome Therapeutics, Inc. is a clinical-stage biopharmaceutical company. The Company is engaged in developing therapies for the management of central nervous system disorders, including pain. It operates in the business of developing novel therapies for the management of CNS disorders segment. Its product candidate, AXS-02 (disodium zoledronate tetrahydrate), is an oral, targeted, non opioid therapy for chronic pain. It is developing AXS-02 for the treatment of pain in over three conditions, such as complex regional pain syndrome, knee osteoarthritis associated with bone marrow lesions, and chronic low back pain, associated with type I, or mixed type I and type II Modic changes. Its product candidate, AXS-05, is a fixed dose combination of dextromethorphan and bupropion. It is developing AXS-05 for the treatment of over two conditions, such as treatment-resistant depression and agitation in patients with Alzheimer's disease.
The Trade Desk, Inc. is a technology company. The Company provides a self-service platform that enables clients to purchase and manage digital advertising campaigns across various advertising formats, including display, video and social, and on a range of devices, including computers, mobile devices, and connected television. Its platform enables a media planner or buyer at an advertising agency to purchase digital media programmatically on various media exchanges and sell-side platforms; acquire and use third-party data to optimize and measure digital advertising campaigns; deploy their, or their client's, own first-party data in order to optimize campaign efficacy; link digital campaigns to offline sales results or other business objectives; access other services, such as its data management platform and publisher management platform marketplace, and use its user interface and application programming interfaces (APIs) to build their own technology on top of the Company's platform.
Coda Octopus Group, Inc. designs and manufactures real-time three-dimensional (3D) sonar solutions and other products for sale to the subsea, defense, mining and marine sciences markets, among others. In addition, the Company supplies, through its marine engineering businesses, services to prime defense contractors. The Company operates through two segments: Marine Technology Business (Products segment) and Marine Engineering Business (Services segment). The Products segment sells marine products in range of market segments, including commercial marine geophysical survey; oil and gas; energy and renewables; underwater security, law enforcement, and naval operations; underwater construction; environmental applications, and salvage and decommissioning. The Services segment includes Coda Octopus Colmek, Inc. and Coda Octopus Martech Limited. The Services segment provides engineering services to a range of clients in the defense markets.
Enphase Energy, Inc. is a provider of energy management solutions. The Company is engaged in designing, developing, manufacturing and selling microinverter systems for the solar photovoltaic industry. Its semiconductor-based microinverter system converts direct current electricity to alternating current electricity. Its microinverter system consists of three components: Enphase microinverters, an Envoy gateway and Enlighten cloud-based software. Its Enphase microinverters provide power conversion at the individual solar module level by a digital architecture that incorporates custom application specific integrated circuits, specialized power electronics devices, and an embedded software subsystem. Envoy bi-directional communications gateway provides collecting and sending data to Enlighten software. Enlighten cloud-based software provides the capabilities to remotely monitor, manage, and maintain an individual system or a fleet of systems.
Catalyst Pharmaceuticals, Inc., formerly Catalyst Pharmaceutical Partners, Inc., is a development-stage biopharmaceutical company. The Company is focused on developing and commercializing therapies for people with rare debilitating diseases. The Company has three drugs in development: Firdapse, CPP-109, and CPP-115. The Company's Firdapse is indicated for the treatments of lambert-eaton myasthenic syndrome and congenital myasthenic syndromes. Firdapse consists of the phosphate salt of amifampridine. The Company has completed the Phase III trial of Firdapse. The Company's CPP-109 (vigabatrin) is a gamma-aminobutyric acid aminotransferase inhibitor. CPP-109 is indicated for the treatment of Tourette's Disorder. The Company's CPP-115 is a GABA aminotransferase inhibitor. CPP-115 is indicated for the treatment of selected neurological indications, such as complex partial seizures and Tourette's Disorder, and epilepsy.
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 marginal, 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. However, because they do not usually produce my targeted 10% monthly growth, I tend to leverage gains by purchasing them only on margin.
My four Dow 30 picks for next week are Apple (AAPL), Goldman Sachs (GS), United Technologies (UTX), and Microsoft (MSFT). The rationale for their selection is that these four 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.
These stocks tend to satisfy my personal monthly growth targets only when fully margined.
Next Week's Leveraged ETF Picks
For this coming week, three leveraged Exchange-Traded Funds (ETFs) qualify as picks on the basis of a weighted combination of BLM scores and annual percentage growth. These three are as follows: Direxion Daily Technology Bull 3x Shares (TECL), ProShares Ultra QQQ (QLD), and VelocityShares 3X Long Crude Oil (UWT).
Although such ultra ETFs are already fully leveraged, it is possible to augment their gains (or losses) an additional 10% by purchasing them on margin. It is important to regularly compare results of various strategies, including individual BLM stock picks, Dow 30 stock picks, and leveraged ETF picks.
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 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 am/we are long UWT. 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.