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 34 of 2019—8/19-8/23
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 within 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. It is also useful to enhance bounce/lag ratio scores with money-flow index scores to sharpen timing of purchases and sales.
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 and FANG stocks, and leveraged exchange-traded funds and notes. This is analogous to fishing for the largest fish in three adjacent ponds simultaneously. This past week individual high-momentum stocks best returns of these three approaches—up 3.94%, with leveraged exchange-traded funds and notes in second position—up 1.76%.
Performance of Last Week’s Picks
Last week’s five BLM stock picks gained an estimated overall average of 3.94% on the week in spite of challenging market conditions. 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 2.26% for the week. This outcome shows the practical advantage of trailing stop-loss orders. During the same week, the S&P 500 Index lost -1.03%.
|Stock Symbols - Last Week 33||Weekly Gain (Loss)||Weekly Gain (Loss) with 2% Stop-Loss*|
|Digital Turbine, Inc. (APPS)||3.00%||6.38%|
|EverQuote, Inc. (EVER)||6.18%||8.08%|
|Enphase Energy, Inc. (ENPH)||0.39%||1.44%|
|Shopify Inc. (SHOP)||(3.03%)||(0.96%)|
|Roku, Inc. (ROKU)||4.56%||4.75%|
*Use of 2% trailing stop-loss orders is a personal trading-style decision with the advantage of preventing large losses and the disadvantages of triggering premature sales and increased portfolio turnover. 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 some other trading strategies. High-momentum stocks are subject to more volatile price swings than low-momentum stocks. The Dow 30 and FANG stocks, as reported below, due to large capitalization, tend to be less volatile than the high-momentum picks. Thus, there is often less need to use trailing stop-loss orders with them, and consequently they involve less portfolio turnover. However, I am now reporting trailing stop-loss results for Dow 30 stocks and for leveraged ETFs as well.
Please bear in mind that I do not hold positions in all of these BLM-identified stocks. Therefore, although weekly performance of the stocks from Friday close to Friday close 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, and intra-day volatility. News events and block trades with low liquidity can move stock prices massively between sessions. Because of this, it is not always possible to make a suitable entry purchase on Monday mornings. Therefore, in calculating the estimated gains with stop-losses, I have gone to using the mid-range trading point on Mondays as the point of entry and the point which is 2% below the weekly trading high on any subsequent day as the point of exit. These prices can be found as part of the historical record presented at Yahoo finance.
Remember also that the picks offered here represent a weekly snapshot of stock opportunities in motion. Because I perform analyses and trade daily, I often find picks that run their course during the week and are no longer viable at the weekly report time. Trading stocks is analogous to shooting an arrow at a moving target. Also, because I frequently enter trading positions not viable at the time of this weekly report, my personal trading results tend to exceed the recorded performances of these weekly picks.
Comparative BLM/S&P 500 Performance through 33 Weeks of 2019
Bounce/Lag Momentum +127.66% 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 seven times the performance of the S&P500 Index. BLM 33-week estimated composite gains of 127.66% compare favorably with S&P500 composite gains of 16.55%, 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 294% when fully margined, to the extent that these stocks were marginable. However, note that, unlike Dow 30 stocks, I do not advocate trading most of these particular stocks on margin because they tend to be too volatile.
While these year-to-date gains of 127.66% may seem impressive, it is instructive to note that you could have surpassed these gains by merely holding Facebook (FB) in your portfolio on margin. Fully margined, the year-to-date gain on Facebook stock was 132.4%.
Equity Market Conditions
Last week’s positive Outlook Ratio of 1.338 failed to offset negative developments of Chinese Yuan devaluation and trade war expansion. The S&P 500 Index lost 1.03% on the week. Markets are often driven by events that are beyond any one person’s prediction or control. However, in the absence of market-moving external developments, technical indicators remain dependable.
For this coming week, five stocks were found to reach or exceed the critical BLM value of 30 from among more than 5000 stocks surveyed, all 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--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. I call this ratio an “outlook ratio.” It is a very short-term indicator that may change direction within the week. As you can see in the following chart for the S&P500 Index, the RSI Index now stands at a low value of 44.87, but the MFI Index is at a lower value of 27.28. The ratio 44.87/27.28 is 1.645, which is above 1.00 and implies a positive bias for the coming week. Bear in mind, however, that major news events can swiftly affect market trends as we saw last week.
Note also in the chart above that the S&P 500 Index appears to have bounced off the 2800 level this past week.
A Look at Next Week’s BLM Picks
For next week, the BLM algorithm has identified 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. Because timing is critical, these scores have also been weighted by money-flow-index scores. In the table below the top five qualifying stocks are reported along with each stock’s BLM score and relative ranking.
|Stock Pick - Week 34||B/LM Score||Combined Ranking|
|Enphase Energy, Inc. (ENPH)||73.87||1|
|EverQuote, Inc. (EVER)||49.67||2|
|NovoCure Limited (NVCR)||45.09||3|
|Atlanticus Holdings Corp. (ATLC)||36.99||4|
|Research Frontiers Inc (REFR)||33.19||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. It is also useful to apply the fore-mentioned outlook ratio for individual stocks.
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—DC--electricity to alternating current—AC--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--ASIC, 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.
EverQuote, Inc. operates an online insurance marketplace for insurance shopping in the United States. The Company’s data and technology platform connects users seeking insurance products with relevant options from a network of insurance providers. Its network consists of over 160 insurance carriers including 20 property and casualty carriers and over 7000 insurance agencies. The Company provides its services to consumers through www.everquote.com. It also offers other products and services such as EverQuote Pro for agents, EverQuote Pro for carriers, EverDrive, SmartCampaigns, and seamless consumer handoffs.
NovoCure Limited is a commercial-stage oncology company. The Company is engaged in developing a cancer treatment centered on a therapy called TTFields, the use of electric fields tuned to specific frequencies to disrupt solid tumor cancer cell division. Its TTFields delivery system is used for the treatment of glioblastoma—GBM--and to advance programs testing of TTFields in multiple solid tumor indications through its clinical pipeline. In addition to its clinical and commercial progress in GBM, it is planning or conducting clinical trials evaluating the use of TTFields in brain metastases, non-small-cell lung cancer--NSCLC, pancreatic cancer, ovarian cancer and mesothelioma. TTFields are delivered through a portable, medical device. The complete delivery system, which is designed to allow patients to go about their daily activities while receiving continuous cancer treatment, includes a portable electric field generator, transducer arrays, rechargeable batteries and accessories.
Atlanticus Holdings Corporation is focused on providing financial services. Through its subsidiaries, the Company offers an array of financial products and services. The Company operates through two segments: Credit and Other Investments, and Auto Finance. The Company's Credit and Other Investments segment includes its point-of-sale and direct-to-consumer finance operations, investments in and servicing of its various credit card receivables portfolios and other product development and limited investment in consumer finance technology platforms that capitalize on its credit infrastructure. The Company's Auto Finance segment operations are principally conducted through its CAR platform, which purchases and services loans secured by automobiles from or for a pre-qualified network of independent automotive dealers and automotive finance companies in the buy-here, pay-here used car business. The Company also provides loan servicing activities.
Research Frontiers Incorporated is engaged in the development and marketing of technology and devices to control the flow of light. The Company develops and licenses its patented suspended particle device--SPD-Smart--light-control technology to other companies that manufacture and market either the SPD-Smart chemical emulsion, light-control film made from the chemical emulsion, lamination services, electronics to power end-products incorporating the film, or the end-products themselves, such as smart windows, skylights and sunroofs. Research Frontiers has approximately 40 companies that, in the aggregate, are licensed to serve over four SPD-Smart application areas, including aerospace, architectural, automotive and marine products. Its VariGuard business unit markets and sells SPD-Smart products directly to customers for specialty uses, such as the protection of artwork and light-sensitive documents in museums and private collections.
DOW 30 and FANG Picks
Many readers are especially interested in large-cap, low-risk DOW 30 and FANG 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 and FANG 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. This past week it was advantageous to enter stop-loss orders for these stocks. Results reported below involved use of trailing 2% stop-loss orders exactly as described in the BLM momentum section above.
My five Dow 30 and FANG picks for last week are listed sequentially by combined-ranks desirability followed by weekly performance percentages as follows: 1- American Express (AXP), -1.22%; 2 – Microsoft (MSFT), -0.82%; 3 – Procter & Gamble (PG), 2.06%; 4 – Facebook (FB), -2.21%; and 5 – McDonalds, -1.21%. Note that average performance for the week without trailing stop-loss orders was -0.68%. However, when 2% trailing stop-loss orders were applied as described above, the average loss was -0.20%. When fully margined as recommended, the average loss was -0.66%.
For next week the five best picks among the Dow 30 and Fang stocks using combined-ranks analysis, along with their combined-ranks scores, are as follows: 1 - Procter & Gamble, 26; 2 - Microsoft (MSFT), 26; 3 – American Express, 33; 4 – Apple (AAPL), 40; and 5 – Visa (V), 43. Note that, with combined-ranks analysis over six predictive variables, lower scores are preferable to higher scores.
Leveraged ETF and ETN Picks
For this past week, the five Exchange-Traded Funds and Notes—ETFs and ETNs—that were chosen by analysis, along with their weekly trailing stop-loss percentage performances, are listed as follows: 1 - Sprott Gold Miners ETF (SGDM), -1.62%; 2 - Direxion Daily Real Estate Bull 3X Shares (DRN), 0.07%; 3 - VelocityShares 3X Long Gold ETN (UGLD), 0.92%; 4 - Direxion Daily Homebuilders Bull 3X Shares (NAIL), 3.85%; and 5 - Direxion Daily Technology Bull 3X Shares, 5.57%. The average weekly gain across the five leveraged ETFs and ETNs using 2% trailing stop-loss orders was 1.76%. However, without 2% trailing stop-loss procedure described above, the average loss was -0.73%.
For next week, the five best leveraged ETF and ETN picks from among all listed ETFs and ETNs, along with their combined-ranks scores, are listed as follows: 1 - UBS ETRACS Monthly Reset 2X Leveraged Homebuilders ETN (HOML), 25; 2 - Direxion Daily Real Estate Bull (DRN), 45; 3 - Velocity Shares 3X Long Gold ETN, (UGLD), 49; 4 - Direxion Daily Homebuilders Bull 3X Shares (NAIL), 46; and 5 -Direxion Daily Technology Bull 3X Shares (TECL).
Although ultra ETFs and ETNs may already be fully leveraged, it may be possible to augment their gains (or losses) an additional 10% by purchasing them on margin.
Weekly Comparative Performance
It is important to compare results of various strategies regularly, including individual B/L momentum stock picks, leveraged Dow 30 and FANG stock picks, and leveraged ETF and ETN picks. Weekly comparative performances using estimated 2% tailing stop-loss procedure are reported in the following table.
|Strategy||Percentage Gain (Loss)||Performance Rank|
|Leveraged Dow 30 Stocks||1.76%||2|
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. It is not uncommon for Momentum Breakout stock selections to move into strong Bounce/Lag Momentum scores with sustaining positive momentum conditions from prior weeks.
For comparison between the 2 different types of momentum approaches you can find last Week 33 Momentum Breakout Stock selections 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.
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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.