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.
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 BLM-identified 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 individual BLM-identified stocks with trailing stops afforded the best returns of these three approaches.
Performance of Last Week's Picks
Last week's four stock picks gained an overall average of 2.25% 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 loss of 0.52% 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 0.76%.
|Stock Symbol||Weekly Gain (Loss)||Weekly Gain(Loss) with 2% Stop-Loss*|
|Axsome Therapeutics, Inc. (AXSM)||9.64%||9.64%|
|Enphase Energy, Inc. (ENPH)||4.49%||4.49%|
|Coca-Cola Consolidated (COKE)||(19.07%)||(8.03%)|
|Telaria, Inc (TLRA)||2.88%||2.88%|
*Use of 2% trailing stop-loss orders is a personal trading style decision. Even though it has caused me prematurely to sell several good stocks that have later returned to favor, it has saved my neck many times. 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, rather 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 with all stocks for all persons.
Another reason for considering 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.
Please bear in mind that it is not possible for me to hold positions in all of these BLM-identified stocks. Therefore, although weekly performance of the stocks is a matter of record, performance with trailing stops must necessarily be estimated. This is a difficult process because of two facts of life. One of these facts is "slippage"; i.e., the fact that the price at which an order is placed is not necessarily the price at which it will be executed. The other fact is that we have to deal with after-hours and pre-market trading. News events and block trades with low liquidity can move stock prices massively between sessions. Fortunately, this does not happen often. Last week it happened with CPRX, and I failed to account for it in my stop-loss estimation of weekly % gain. I have corrected this problem by resetting trailing stops on the day following massive overnight moves and resetting cumulative BLM gains 7.16% downward. Remember, however, that these are only estimates.
Comparative BLM/S&P 500 Performance through 20 Weeks of 2019
Bounce/Lag Momentum +69.05% 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 quadrupled the performance of the S&P 500 Index. BLM 20-week estimated composite gains of 69.05% compare favorably with S&P 500 composite gains of 15.28% 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 159.51% when fully margined, to the extent that these stocks were marginable. 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 highly challenging for momentum stocks, with the S&P 500 Index losing 0.76%. Market conditions remain under a cloud of uncertainty pending resolution of China trade issues. For this coming week, nine stocks were found to reach or exceed the critical BLM value of 30, the top five of which are reported below. In addition to noting the number of qualifying stock picks, another 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. Thus, I call this an "outlook ratio." As you can see in the following chart for the S&P 500 Index, the RSI Index now stands at 45.59, but the MFI Index is at a lower value of 33.32. The ratio 45.59/33.32 is 1.368, which is significantly above 1.00. Therefore, I look for strong upward market movement in the coming week, barring any major surprising news announcements.
A Look at Next Week's BLM Picks
For next week, the BLM algorithm has identified nine stocks with a qualifying BLM score at or above 30, from among over 5,000 stocks examined. Recall that a BLM score at or above 30 is normally required to qualify as a weekly pick. In the table below, I am reporting the top five stocks along with each stock's BLM score and relative ranking. Note that AXSM has returned as a pick for several consecutive weeks.
|Stock Pick - Week 21||B/LM Score||Combined Ranking|
|Kelso Technologies, Inc. (KIQ)||55.57||1|
|Catasys, Inc (OTC:CATS)||53.03||2|
|Rave Restaurant Group, Inc. (RAVE)||49.90||3|
|Telaria, Inc (TLRA)||43.57||4|
|Axsome Therapeutics, Inc. (AXSM)||40.13||5|
Charts of each of these picks are available below. The live tracking spreadsheet for the Bounce/Lag Momentum selections is available under the Tools pull-down menu for members and is linked here, although it does not as yet reflect the benefits of trailing stop-loss orders.
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.
Kelso Technologies Inc. designs, engineers, produces, markets, and distributes various products for the rail sector in the United States and Canada. The company's products are used to reduce the risk of environmental harm due to non-accidental events in the transportation of hazardous commodities. It offers bottom outlet, pressure relief, and vacuum relief valves; one-bolt manway; universal manway adapter; pressure cars; pressure differential parts; and wheel cleansing system, as well as rail car kits for rail industry. The company also provides trucking components for tank trailers; eduction tube; and emergency response kits. In addition, the company offers active suspension control systems for no road vehicles. The company was formerly known as Kelso Resources Ltd. and changed its name to Kelso Technologies, Inc. in July 1994. Kelso Technologies, Inc. was founded in 1987 and is headquartered in Surrey, Canada.
Catasys, Inc. is a provider of data analytics based specialized behavioral health management and treatment services to health plans through its OnTrak program. The company's program utilizes member engagement and patient centric treatment that integrates evidence based medical and psychosocial interventions along with care coaching in a 52-week outpatient program. The company operates through healthcare services segment. The healthcare services segment includes OnTrak and its integrated substance dependence solutions marketed to health plans, other third-party payers through a network of licensed, and company managed healthcare providers. Its initial focus was on members with substance use disorders. It provides services to commercial (employer funded), managed Medicare Advantage and managed Medicaid populations. Its OnTrak substance dependence programs include medical and psychosocial interventions, psychosocial programs and integrated care-coaching services.
Rave Restaurant Group, Inc. operates and franchises pizza buffet, delivery/carry-out and express restaurants domestically and internationally under the trademark, Pizza Inn, and operates and franchises domestic fast casual restaurants under the trademarks Pie Five Pizza Company (Pie Five). The company's operating segments include Pizza Inn Franchising, Pie Five Franchising and Company-Owned Restaurants. The Pizza Inn and Pie Five Franchising segments establish franchisees, licensees, and territorial rights. The Company-Owned Restaurant segment includes sales and operating results for all company-owned restaurants. Assets for this segment include equipment, furniture and fixtures for the company-owned restaurants.
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.
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 therapeutic 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.
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. However, because they do not usually produce my targeted 10% monthly growth, I tend to leverage gains by purchasing them only on margin.
My three Dow 30 picks for next week are listed sequentially as follows: 1- Cisco Systems (CSCO), 2- United Technologies (UTX), and 3 - 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 qualify as picks on the basis of a weighted combination of BLM scores and annual percentage growth. These three are as follows: ProShares UltraPro Crude Oil Shares (OILU), VelocityShares 3X Long Crude Oil (UWT), and Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL). These three picks are returning from last week.
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 compare results of various strategies regularly, 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 for 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.