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 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 two BLM stock picks gained an estimated overall average of 8.12% 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 7.12% 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 4.41%.
|Stock Symbols - Last Week 23||Weekly Gain (Loss)||Weekly Gain(Loss) with 2% Stop-Loss*|
|Adverum Biotechnologies, Inc. (ADVM)||10.95%||11.74%|
|GlobalSCAPE, Inc. (GSB)||3.28%||4.49%|
*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 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. 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.
Remember also that the picks offered here represent a weekly snapshot of stocks in motion. Because I perform analysis daily, I often find picks that run their course during the week and are no longer presentable at this weekly report time. For example, last Thursday I found and purchased OESX for a 17% gain, but I unloaded it on Friday as it went on to give back 10%. Truly equities trading is shooting at a moving target.
Comparative BLM/S&P 500 Performance through 23 Weeks of 2019
Bounce/Lag Momentum +93.25% 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 93.25% compare favorably with S&P 500 composite gains of 15.90% 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 215% 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 a highly challenging week for market prognosticators. Based on the RSI/MFI Outlook Ratio, I had predicted a sharp downturn in the market, only to witness the S&P 500 Index gain a resounding 4.41%. Of course, I could not foresee that the Federal Reserve Board would promise future rate cuts, or that the threat of Mexican tariffs would end abruptly. Markets are often driven by news events that are beyond any one person's prediction or control. In the absence of market-moving news developments, technical indicators remain dependable however.
Market conditions remain under a cloud of uncertainty pending resolution of China trade issues, but have brightened considerably with the end of the threat of Mexican trade tariffs and with the prospect of Fed rate cuts. You can see in the chart below that the S&P 500 Index has rebounded sharply above its 200-day moving average.
For this coming week, 10 stocks were found to reach or exceed the critical BLM value of 30, five 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; one suggests 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 56.31, but the MFI Index is at a much lower value of 47.13. The ratio 56.31/47.13 is 1.195, which exceeds 1.00 and augurs well for the coming week. Bear in mind, however, that major news events can swiftly affect market trends.
A Look at Next Week's BLM Picks
For next week, the BLM algorithm has identified more than five 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 qualifying stocks along with each stock's BLM score and relative ranking.
|Stock Pick - Week 24||B/LM Score||Combined Ranking|
|ConforMIS, Inc. (CFMS)||53.73||1|
|Zynex, Inc. (NASDAQ:ZYXI)||52.26||2|
|MongoDB, Inc. (MDB)||47.87||3|
|Arrowhead Pharmaceuticals, Inc. (ARWR)||35.70||4|
|Okta, Inc. (OKTA)||34.82||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 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.
ConforMIS, Inc. is a medical technology company. The Company uses its iFit Image-to-Implant technology platform to develop, manufacture and sell joint replacement implants, which are individually sized and shaped, to fit each patient's anatomy. The Company's iFit technology platform is applicable to various joints. It offers a line of customized knee implants designed to restore the natural shape of a patient's knee. It offers iTotal CR, which is a total knee replacement implant. Its iFit technology platform consists of three elements, including iFit Design, its algorithms and computer software that is used to design customized implants and associated single-use patient-specific instrumentation referred to as iJigs, based on computed tomography scans of the patient and to prepare a surgical plan customized for the patient (iView); iFit Printing, which is a three-dimensional printing technology used to manufacture iJigs; and iFit Just-in-Time manufacturing and delivery capabilities.
Zynex, Inc. operates through the Electrotherapy and Pain Management Products segment. The Company conducts its business through its subsidiaries and the operating subsidiary is Zynex Medical, Inc. Its other subsidiaries include Zynex Monitoring Solutions, Inc. and Zynex Europe, ApS. ZMI designs, manufactures and markets medical devices that treat chronic and acute pain, as well as activate and exercise muscles for rehabilitative purposes with electrical stimulation. ZMS is in the process of developing its blood volume monitoring product for non-invasive cardiac monitoring. ZEU intends to focus on sales and marketing its products within the international marketplace, upon receipt of necessary regulatory approvals. It markets and sells Zynex-manufactured products and distributes private labeled products. Its products include NexWave, NeuroMove, InWave, Electrodes and Batteries. ZMI devices are intended for pain management to reduce reliance on drugs and medications.
MongoDB, Inc. is a modern, general purpose database platform. Its platform is designed to run applications at scale across a broad range of use cases in the cloud, on-premise or in a hybrid environment. Its primary subscription package is MongoDB Enterprise Advanced, which includes its proprietary database server, security, enterprise management capabilities, its graphical user interface, analytics integrations and technical support. It also offers MongoDB Atlas, its cloud hosted database-as-a-service (DBaaS) offering that includes infrastructure and management of its community server offering. The MongoDB enterprise database server, called Enterprise Server, is its proprietary database. The Company's other products include Community Server, a free-to-download version of its database and MongoDB Stitch, a backend-as-a-service. The Company also provides professional services to its customers, including consulting and training.
Arrowhead Pharmaceuticals, Inc., formerly Arrowhead Research Corporation, develops medicines that treat intractable diseases by silencing the genes that cause them. Using a portfolio of ribonucleic acid chemistries and modes of delivery, the Company's therapies trigger the RNA interference mechanism to induce knockdown of target genes. The Company is focused on developing drugs for diseases with a genetic basis, characterized by the overproduction of one or more proteins. The Company's preclinical pipeline of RNA interference therapeutics includes both subcutaneously administered liver-targeted candidates and extra-hepatic candidates. The Company's pre-clinical-stage drug candidates include ARO-HBV, ARO-AAT, ARO-LPA, ARO-AMG1, ARO-F12 and ARO-HIF2. ARO-HBV is an RNAi therapeutic candidate for the treatment of chronic hepatitis B infection. ARO-AAT is a therapeutic candidate for the treatment of liver disease associated with Alpha-1 Antitrypsin Deficiency.
Okta, Inc., is an independent provider of identity for the enterprise. The Company's Okta Identity Cloud platform provides identity management solutions that enable customers to secure their users and connect them to technology and applications. It also connects enterprises to their customers, employees, contractors, and partners. It allows users to access a range of cloud applications, websites, mobile applications and service from various devices. Its platform is used by information technology organizations to secure their enterprise and by developers to build customer-facing websites and applications. Okta Identity Cloud consists of a suite of products to manage and secure identities. It offers a range of products, such as Adaptive Multi-Factor Authentication, Universal Directory, Lifecycle Management products, Single Sign-On, application program interface Access Management and Mobility Management.
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- Disney (DIS), and 3 - Apple (AAPL). 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 target only when fully margined.
This past week the three best Dow 30 stocks by these same criteria (CSCO, DIS, and MSFT) gained an average of 6.09% before leveraging, and gained 20.09% when fully margined. This indicates that trading leveraged Dow 30 stocks was more profitable last week on average than trading leveraged ETFs or individual BLM Momentum stocks without leveraging.
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: Direxion Daily Utilities Bull 3X Shares (UTSL), Direxion Daily Technology Bull 3X Shares (TECL), and Direxion Daily Homebuilders and Supplies Bull 3X Shares (NAIL). Last week's two leveraged ETF picks (DRN and UTSL) gained an average of 7.06%.
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 leveraged Dow 30 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 24 Momentum Breakout Stock selections 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)
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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.