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 37 of 2019-9/9-9/13
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 leveraged Dow 30 and FANG stocks showed the best returns of these three approaches-up 12.31%, with individual momentum stocks in second position-up 3.42%.
Performance of Last Week's Picks
Last week's three BLM stock picks gained an estimated overall average of 3.42% 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 2.49% for the week. This outcome shows the practical advantage of trailing stop-loss orders. During the same week, the S&P 500 Index gained 1.79%.
|Stock Symbols - Last Week 36||Weekly Gain (Loss)||Weekly Gain (Loss) with 2% Stop-Loss*|
|Roku, Inc. (ROKU)||12.22%||9.01%|
|Digital Turbine, Inc. (APPS)||(4.47%)||1.21%|
|Alteryx Inc. (AYX)||(0.27%)||1.72%|
*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 36 Weeks of 2019
Bounce/Lag Momentum +145.96% 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 36-week estimated composite gains of 145.96% compare favorably with S&P500 composite gains of 19.81%, 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 337% when fully margined, to the extent that these stocks were marginable. However, note that, unlike Dow 30 stocks, I do not advocate trading many of these particular stocks on margin because they tend to be too volatile.
Equity Market Conditions
Last week's equity market action ended with gains of 1.79% in the S&P 500 Index. Dow 30 stocks climbed sharply, while precious metals gave back some of their earlier gains. Moderating messages from Chinese trade authorities extended hope of a trade resolution. 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 often changes direction within the week. As you can see in the following chart for the S&P500 Index, the RSI Index now stands at a value of 58.33, and the MFI Index is at a higher value of 70.19. The ratio 58.33/70.19 is 0.831, which is below 1.00 and implies a negative bias for the coming week. Bear in mind, however, that major news events can swiftly affect market trends, as we saw last week.
There are some positive indicators from a technical standpoint however. The first is that the market appears to have broken through resistance at the 2900 level. The second is that we can see a positive MACD crossover pattern above. Time will ultimately dictate market direction.
A Look at Next Week's BLM Picks
For next week, the BLM algorithm has identified five stocks with a qualifying BLM score near to 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 are often best 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 36||B/LM Score||Combined Ranking|
|Roku, Inc. (ROKU)||100.70||1|
|Hebron Technology Co., Ltd. (HEBT)||82.97||2|
|Cardlytics, Inc. (CDLX)||55.75||3|
|SeaChange International, Inc. (SEAC)||33.45||4|
|scPharmaceuticals, Inc. (SCPH)||28.62||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.
Roku, Inc. operates television streaming platform. The Company connects users to streaming content, enables content publishers to build and monetize audiences and provides advertisers with capabilities to engage consumers. Its Roku platform allows users to personalize their content selection with cable television replacement offerings and other streaming services that suit their budget and needs. Ad-supported channels available on the Roku platform include CBS News, Crackle, The CW Television Network and Vice; subscription channels include HBO Now, Hulu and Netflix, as well as traditional pay TV replacement services like DirecTV Now, Sling TV and Sony PlayStation Vue; and transactional channels include Amazon Video, Google Play and Vudu. Its product categories include advertising, Roku TVs and Streaming Players.
Hebron Technology Co., Ltd. is engaged in developing, manufacturing and providing customized installation of valves and pipe fittings for use in the pharmaceutical, biological, food and beverage, and other clean industries. The Company offers its customers with pipeline design, installation, construction, ongoing maintenance services, as well as holistic solution services. The Company is also specialized in designing and implementing solutions services for industries with a need for sanitary fluid systems with product manufacture, installation services and after-sales services. The Company's product line focuses on the pharmaceutical engineering sector, as its products are used in the medical, biological, food and beverage, and other clean industries. The Company's product line includes Diaphragm Valves, Angle Seat Valves, Sanitary Liquid-Ring Pumps, Clean-in-Place-CIP - Return Pump, Sanitary Ball Valves and Sanitary Pipe Fittings.
Cardlytics, Inc. is engaged in developing a purchase intelligence platform. The Company delivers relevant and measurable marketing analysis with purchase data from over financial institutions. The purchase data includes debit, credit, and bill pay data from online and in-store transactions. It helps the marketers identify, reach and influence likely buyers at scale, and measure the impact of marketing spends. The Company also operates an advertising channel, Cardlytics Direct. Cardlytics Direct delivers tailored marketing for marketers and financial institutions - FI. It provides personalized offers and suggestions for FI consumers on their purchase.
SeaChange International, Inc. (SeaChange) is engaged in the delivery of multiscreen video. The Company's products and services facilitate the aggregation, licensing, management and distribution of video and advertising content for cable television system operators, telecommunications companies, satellite operators and media companies. SeaChange sells its software products and services across the world, to television service providers, including cable television system operators, telecommunications companies, satellite operators and media companies. Its systems enable service providers to offer other interactive television services that allow subscribers to receive personalized services and interact with their video devices. Its business consists of three product areas: multiscreen video backoffice, advertising and video gateway software solutions. It also offers SeaChange Infusion Advanced Advertising Platform, Adrenalin, SeaChange Infusion Advanced Advertising Platform and Nucleus.
scPharmaceuticals, Inc., is a biopharmaceutical company. The Company is engaged in developing pharmaceutical products for subcutaneous delivery. The Company offers sc2Wear Infusor, which is a small pump that attaches to the body using a standard medical adhesive. The sc2Wear Infusor injects the drug into the body slowly, similar to an intravenous-IV - drip. The Company's products administered subcutaneously through the sc2Wear Infusor. The Company's pipeline programs include: scFurosemide lead product candidate, Furoscix, consists of its proprietary subcutaneous formulation of furosemide delivered via sc2Wear Infusor for diuresis in heart failure patients outside of the acute care setting. The Company has completed two pivotal clinical studies, four exploratory clinical studies, and 12 human factor studies for Furoscix, and scCeftriaxone an antibiotic used intravenously for the treatment of infections caused by gram-positive and gram-negative organisms.
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 not advantageous to enter stop-loss orders for these stocks. Results reported below do not involve use of trailing 2% stop-loss orders 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- Procter & Gamble (PG), 2.20%; 2 - Microsoft (MSFT), 0.90%; 3 - Home Depot (HD), 2.03%; 4 - Visa, 2.92%; and 5 - Apple (AAPL), 2.17%. Note that average performance for the week without trailing stop-loss orders was 2.00%. However, when 2% trailing stop-loss orders were applied as described above, the average gain was only 1.09%. When fully margined as recommended, the average gain was 6.60% without stop-loss order and 3.60% with stop-loss orders. This discrepancy is related to the fact that the method for estimating gains with stop-loss orders assumes that the stocks were sold at a loss of 2% below their peak, even if a stop-loss sell order was not triggered.
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 (PG), 37
2 - Visa (V), 42
3 - Home Depot (HD), 44
4 - Microsoft (MSFT), 47
5 - Travelers (TRV), 56.
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 2% trailing stop-loss percentage performances, are listed as follows: 1 - UBS ETRACS Monthly Reset 2X Leveraged Homebuilders ETN (HOML), 2.95%; 2 - UBS ETRACS Monthly Pay 2X Leveraged MSCI US REIT Index ETN (LRET), -.07%; 3 - Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL), 6.49%; 4 - Direxion Daily Gold Miners Index Bull 3X Shares (NUGT), 2.91% 5 - Direxion Daily Real Estate Bull 3X Shares (DRN), 4.56%. The average weekly gain across the five leveraged ETFs and ETNs using 2% trailing stop-loss orders was 3.37%. However, without 2% trailing stop-loss procedure described above, the average loss was -0.40%.
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), 13
2 - Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL), 29
3 - Direxion Daily Technology Bull 3X Shares (TECL), 35
4 - Direxion Daily Real Estate Bull 3X Shares (DRN), 40
5 - Direxion Daily Aerospace & Defense Bull 3X Shares (DFEN), 43
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 / FANG||6.60%||1|
|B/L Momentum Stocks||3.98%||2|
|Leveraged ETFs / ETNs||3.37%||3|
You can see that Leveraged Dow 30 and FANG stocks outperformed the other strategies this past week. Appropriate use of margin can provide exceptional gains.
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 the Week 37 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.
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.