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 23 of 2019 (6/3-6/7)
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 high-momentum 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 high-momentum stocks with trailing stops afforded the best returns of these three approaches.
Performance of Last Week’s Picks
Last week’s five BLM stock picks gained an estimated overall average of 1.52% 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 3.85% 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 2.62%.
|Stock Symbols - Last Week 22||Weekly Gain (Loss)||Weekly Gain(Loss) with 2% Stop-Loss*|
|Enphase Energy, Inc. (ENPH)||(1.24%)||3.91%|
|Axsome Therapeutics, Inc. (AXSM)||(7.16%)||1.05%|
|Roku, Inc. (ROKU)||(5.62%)||(2.84%)|
|Arrowhead Pharmaceuticals, Inc. (ARWR)||(1.39%)||3.95%|
*Use of 2% trailing stop-loss orders is a personal-trading-style decision. Even though it has at times 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 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. High-momentum stocks are subject to more volatile price swings than low-momentum stocks. The Dow 30 stocks, as reported below, tend to be less volatile than the picks reported above. Thus, there is often less need to use trailing stop-loss orders with them, and consequently they involve less portfolio turnover.
Please bear in mind that I do not 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. Remember, therefore, that these trailing stop gains are only estimates.
Comparative BLM/S&P 500 Performance through 22 Weeks of 2019
Bounce/Lag Momentum +83.61% 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 estimated average performance of the Bounce/Lag Momentum stock picks is greater than five times the performance of the S&P 500 Index. BLM 22-week estimated composite gains of 85.13% compare favorably with S&P 500 composite gains of 11.49%, 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 average gains of 197% 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. In the current overall market conditions, I do not recommend any leveraging, whether through use of margin or through use of ultra-exchange-traded funds.
Next Week’s Market Conditions
Last week was another highly challenging week for momentum stocks, with the S&P 500 Index losing 2.62%. Market conditions remain under a cloud of uncertainty pending resolution of China trade issues, and have worsened with the introduction of tariffs against Mexico. You can see below that the S&P 500 Index has broken below its 200-day moving average.
For this coming week only two stocks were found to reach or exceed the critical BLM value of 30, both of which are reported below. In addition to noting the number of qualifying BLM 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 30.84, but the MFI Index is at a much higher value of 39.45. The ratio 30.84/39.45 is 0.782, which is the lowest value since I began tracking this outlook ratio. Therefore, I look for severe negative market activity in the coming week, barring any major surprising news announcements.
In closer examination of the fifty stocks with highest BLM scores, I see that their average RSI value is only 63.68, by comparison with their average MFI value of 65.54. So this negative phenomenon of money flow outpacing relative strength appears to be highly pervasive at this time.
A Look at Next Week’s BLM Picks
For next week, the BLM algorithm has identified only two 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 both of these qualifying stocks along with each stock’s BLM score and relative ranking.
|Stock Pick - Week 23||B/LM Score||Combined Ranking|
|Adverum Biotechnologies, Inc. (ADVM)||47.50||1|
|GlobalSCAPE, Inc. (GSB)||31.59||2|
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.
Adverum Biotechnologies, Inc. is a clinical-stage gene therapy company targeting unmet medical needs in serious rare and ocular diseases. Adverum has a robust pipeline that includes product candidates designed to treat rare diseases alpha-1 antitrypsin (A1AT) deficiency and hereditary angioedema as well as wet age-related macular degeneration (wAMD). Leveraging a next-generation adeno-associated virus (AAV)-based directed evolution platform, Adverum generates product candidates designed to provide durable efficacy by inducing sustained expression of a therapeutic protein. It has collaboration agreements with Regeneron Pharmaceuticals to research, develop, and commercialize gene therapy products for ophthalmic diseases and Editas Medicine to explore the delivery of genome editing medicines for the treatment of inherited retinal diseases. Its core capabilities include clinical development and in-house manufacturing, specifically in process development and assay development.
GlobalSCAPE, Inc. provides secure information exchange capabilities for enterprises and consumers through the development and distribution of software, delivery of managed and hosted solutions, and provisioning of associated services. The Company's primary product is Enhance File Transfer. Its software products and services include Managed File Transfer Solutions, Secure Content Mobility Solutions, Wide Area File Services, Managed E-Mail Attachment Solution, Consumer-Based File Transfer Solution and professional services. Its solution portfolio facilitates transmission of critical information, such as financial data, medical records, customer files, vendor files, personnel files, transaction activity and other similar documents. The Company enables transmission of critical information using servers, desktop and notebook computers, and a range of network-enabled mobile devices. Its products also provide customers to monitor and audit file transfer activities.
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. However, I cannot recommend leveraging these stocks under current bleak market conditions
My three Dow 30 picks for next week are listed sequentially as follows: 1- Microsoft (MSFT), 2- Disney (DIS), and 3 – Cisco Systems (CSCO). The rationale for their selection is that 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.
These stocks tend to satisfy my personal monthly growth targets only when fully margined. This past week the three best Dow 30 stocks by these same criteria (CSCO, UTX, and MSFT) actually lost an average of 3.38% before leveraging. This indicates that trading individual momentum stocks was more profitable last week on average than trading Dow 30 stocks.
Next Week’s Leveraged ETF Picks
For this coming week, two leveraged Exchange-Traded Funds qualify as picks on the basis of a weighted combination of BLM scores and annual percentage growth. These two are as follows: Direxion Daily MSCI Real Estate Bull 3X Shares (DRN), and Direxion Daily Utilities Bull 3X Shares (UTSL). Last week’s leveraged oil funds suffered heavily from temporary downward pressure on crude oil. At present it seems that real-estate funds appear comparatively attractive.
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 momentum stock picks, Dow 30 stock picks, and leveraged ETF picks. Last week individual momentum stock picks outperformed the other two trading categories.
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.
An illustrative difference between these Weekly Bounce / Lag Momentum stock selections and the Weekly Momentum Breakout stocks is shown below. While both models typically have some overlap in the strong momentum growth selections, the B/LM model is looking for the strongest momentum stocks in closer proximity to 52-week highs as shown in the blue area. The Momentum Breakout model tends to look for early positive price reversals that are attracting high investor inflows for strong breakout gains as illustrated by the red area.
For comparison, the Week 22 Breakout Stock selections from last week are available HERE. 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)
If you are looking for a great community to apply proven financial models with picks ranging from short term breakouts to long term value and forensic selections, please consider joining our 300+ outstanding members at Value & Momentum Breakouts
- Subscribe now and learn many new models and techniques for short and long term trading success.
- Members receive active trading alerts and live stock picks well ahead of published articles.
- Now into our 3rd year, this rapidly growing service has consistently outperformed the S&P 500 every single year!
You really need to read our members' reviews HERE
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.