Week 10 MDA Breakout Forecast: Short-Term Picks To Give You An Edge

Summary

• One sample Breakout Stocks for Week 10 with better-than-10% short-term upside potential and one sample Dow stock.
• The MDA Breakout portfolio is up +41.50% YTD compared to the SP 500 -8.56% YTD in the first 9 weeks of 2020.
• This Week 9: the portfolio gained an average +5.39% led by gains in LAKE +61.39% to the close.
• The streak of weekly selections gaining over 10% in less than 4 or 5 trading days continues to 120 out of 146 trading weeks (82.19%).
• The Momentum Gauges closed Friday after-hours at Negative 113 and Positive 9 after turning negative Monday. Use caution as MDA breakout selections may be impacted by severely negative markets.
• This idea was discussed in more depth with members of my private investing community, Value & Momentum Breakouts. Get started today »

Introduction

The Weekly Breakout Forecast continues my doctoral research analysis on MDA breakout selections over more than 5 years. This subset of the different portfolios I regularly analyze has now reached 146 weeks of public selections as part of this ongoing live forward-testing.

In 2017, the sample size began with 12 stocks, then 8 stocks in 2018, and at members' request into 2020, I now generate 4 selections each week, 2 Dow 30 picks, and a separate article for Growth & Dividend MDA breakout stocks. I now provide 6 different ways to beat the S&P 500 since my trading studies were made public. I have no idea how long I will continue to offer this service.

Remarkably, the frequency streak of 10% gainers within a 4- or 5-day trading week remains at highly statistically significant levels above 80% not counting frequent multiple 10% gainers in a single week. More than 200 stocks have gained over 10% in a 5-day trading week since this MDA testing began in 2017.

2020 YTD Breakout Portfolio Returns

The Breakout Picks are up +41.50% worst case, buy/hold, do nothing, equal weighted returns through Week 9 compared to the S&P 500 -8.56% over the same period. The Best case average weekly returns are +12.56% and worst case 4.61% YTD as shown below. These returns include trading during the Negative Momentum Gauge signal weeks which increases risk of declines. Week 9 closed with average gains of +5.39% compared to -12.98% for the S&P 500.

(Source: Value & Momentum Breakouts)

These breakout picks skew highly positive for high frequency short-term gains in less than 5 days as documented over the past 3 years. I will be removing the best case (High YTD) gains from the chart below next week as it begins to distort the chart between the worst case (Low YTD) gains and the S&P 500 returns.

(Source: Value & Momentum Breakouts)

The Breakout Returns are up +144.43% since inception. These returns continue to outpace the S&P by over 3.5x after three years using the signals. Avoiding trades during the weeks when the Momentum Gauge signals turned negative as shown within the four numbered monthly periods outlined on the chart below has greatly increased total returns to over 160% since inception. I have expected the spread of the coronavirus and Negative Momentum conditions over the past several weeks to start to impact returns, but selections have done well on average despite much higher risk and volatility.(Source: Value & Momentum Breakouts)

You can see how the 4 prior events numbered above relate to the Momentum Gauge tops shown below. These forecasted market tops are detailed in the following article:

Revisiting The Signals That Forecasted Every Major Downturn Since The 2018 Volatility Shock: What's Next

Timing your investments during the most positive momentum periods greatly enhances your weekly returns.

(Value & Momentum Breakouts)

The Momentum Gauge signals are also the basis of a significant new market neutral trading model released here for subscribers to use with bull/bear ETF combinations or just to avoid significant market downturns:

Strongest Market Timing Signals To Enhance Bull/Bear ETF Returns(Value & Momentum Breakouts)

The bull/bear ETF trading signal turned negative at the start of the week for members and produced the following returns while we still remain in the negative momentum signal through the close Friday. I am long FNGD and ERY following the signals.

1. MicroSectors FANG+ 3x Index bull/bear (FNGU)/(FNGD) +21.03%
2. Direxion Daily S&P 500 3x bull/bear (SPXL)/(SPXU) +27.29%
3. SPDR S&P 500 (SPY)/ ProShares Short S&P 500 (SH) +8.84%
4. Alpha Architect Intl Momentum (IMOM)/Dorsey Wright Short (DWSH) +11.97%
5. ProShares UltraPro Nasdaq 3x bull/bear (TQQQ)/(SQQQ) +20.56%
6. Direxion Daily 3x Small Cap bull/bear (TNA)/(TZA) +31.54%
7. Direxion Daily 3x Biotech bull/bear (LABU)/(LABD) +13.57%
8. Direxion Daily 3x Energy bull/bear (ERX)/(ERY) +38.61%
9. MSCI 3x Emerging Market Index bull/bear (EDC)/(EDZ) +7.72%
10. VIX Index 1.5x bull/bear (SVXY)/(UVXY) +45.80%

Market Conditions into Week 10

The Friday anomaly into 2020 is the complete opposite of the Friday anomaly throughout all of 2019 which so far represents by far the worst trading day of the week. Following the worst recorded week since 2008, the daily averages have all turned negative with Friday continuing as the worst day of the week and Monday close behind.

Strong 2020 MDA breakout stocks

There are very few stocks with any positive momentum this week. A small sample from recent weekly selections that may still have some positive momentum without detailed analysis are:

• Celsius Holdings (CELH) +25.74%
• Orion Energy Systems (OESX) +38.71%
• EverQuote (EVER) +8.20%
• Adesto Technologies (IOTS) +53.25%
• the Rubicon Project (RUBI) +21.00%
• Mersana Therapeutics (MRSN) +53.55%
• Relmada Therapeutics (OTC:RLMD) +24.44%
• GrowGeneration (OTC:GRWG) +4.34%
• Epizyme (EPZM) +4.69%
• Lakeland Industries (LAKE) +61.39%

We can confirm more Fed easing in Week 9 with an intervention of +8.46 billion as shown on the Fed's SOMA page below. This brings the total easing to $258.46 billion in liquidity just the past 18 weeks. Fed easing was a very positive condition for the markets between 2009 and 2017, it has only returned in limited form since July 31, 2019.

System Open Market Account Holdings - FEDERAL RESERVE BANK of NEW YORK

The Weekly Momentum Gauge chart below shows the Fed's actual balance sheet action in dark blue over the original Fed scheduled QT (light blue). The Weekly Momentum Gauge chart turned to a negative signal Week 9 with confirmation shown as the red line crossed above the green line on the chart.

(Value & Momentum Breakouts)

The more detailed Daily Momentum Gauge chart below is reserved for members and reflects the last 6 months. The Momentum Gauges closed Friday after hours at Negative 113 and Positive 9.

The MDA momentum gauges have correctly called every major market direction change since they began. These movements and signals were updated in more detail through the Daily Update articles this past week:

• V&M Breakout Morning Update - Feb. 28: Sell-Off Continues With EU Down -3%, DJIA Down -120, Fed Eased $8.4B This Week.
• V&M Breakout Morning Update - Feb. 27: Sell-Off Continues With EU Down -2.5%, DJIA Down -350, S&P 500 Down To 3,070.
• V&M Breakout Morning Update - Feb. 26: Sell-Off Continues With EU Down -1% Again And S&P 500 Down To 3,130.
• V&M Breakout Morning Update - Feb. 25: Spread Of Coronavirus Driving Markets, EU Down -1% And S&P 500 Flat Premarket.
• V&M Breakout Morning Update - Feb. 24: Pandemic Fears Reach Tipping Point Over The Weekend US Markets Down Over -2%, EU -3%

Two conditional signals that are very important to watch:

• Avoid/Minimize trading when the Negative score is higher than the Positive momentum score.
• Avoid/Minimize trading when the Negative score is above 70 on the gauge.

The Week 10 - 2020 Breakout Stocks for next week are:

The Week 10 stocks consist of three Healthcare and one Services sector stock. These stocks are always released in advance to members early Friday and were hit with strong negative momentum conditions on Friday. Continue to use caution with the current negative Momentum Gauge conditions to see if an opportunity for entry emerges next week for the sample stock below:

K12 Inc. (LRN) - Services / Education & Training

Price Target: $25.00

(Source: StockRover)

Feb-24-20 08:30 AM	Michigan Great Lakes Virtual Academy Ready to Help Families Enroll for the 2020-2021 School Year Business Wire
Feb-18-20 10:00 AM	Never Miss the School Bus Again: Enrollment Now Open for Kansas Virtual Academy Business Wire
Feb-11-20 09:30 AM	Passport Academy Charter School Graduates 33 Students, and Honors a Fallen One Business Wire
Feb-07-20 08:30 AM	Indiana Digital Learning School Ready to Help Families Enroll for the 2020-2021 School Year Business Wire

Click to enlarge

(Source: FinViz)

K12 Inc., a technology-based education company, together with its subsidiaries, provides online curriculum, software systems, and educational services to facilitate individualized learning for students primarily in kindergarten through 12th grade in the United States and internationally. It also offers full-time programs virtual and blended public schools; full-time virtual programs, semester courses, and supplemental educational products; and teacher training, teaching, and other academic and technology support services to public schools, school districts, private schools, charter schools, early childhood learning centers, and corporate partners.

A summary of the quarterly financials on LRN shows strong positive growth rates in revenue and EPS. The positive condition and improvements in the balance sheet along with positive quarterly cash flows show a very strong and healthy business. The stock has other key characteristics from my MDA research that deliver higher probabilities for strong short-term gains. The spread of the coronavirus is contributing additional investor interest and positive sentiment toward online education platforms while standard educational facilities are being closed due to containment efforts. All these factors are highly advantageous to K12 Inc. in the short term.

Top Dow 30 Stocks to Watch for Week 10

Applying the same breakout model parameters without regard to market cap or the below-average volatility of mega-cap stocks may produce strong breakout results relative to other Dow 30 stocks.

While I don't expect Dow stocks to outperform typical breakout stocks over the measured five-day breakout period, it may provide some strong additional basis for investors to judge future momentum performance for mega-cap stocks in the short to medium term. Conditions remain highly negative and additional caution is highly recommended until we see more positive reversals in the signals.

In the prior week, Dow picks of The Procter & Gamble Company (PG) -10.63% and Walmart (WMT) -9.19% both fell with the record decline in the worst week since 2008.

The Dow picks for next week is:

3M Company (MMM)

3M is among the better DJIA stocks in the past week that saw record market declines in the worst week since 2008. Conditions are still much less than optimal and with the Momentum Gauges still negative caution is warranted. Early setup for recovery from oversold levels may start to move higher next week from strong consolidation levels.

Background on Momentum Breakout Stocks

As I have documented before from my research over the years, these MDA breakout picks were designed as high frequency gainers.

The point to be made is that the Momentum Breakout model was designed to increase the frequency, i.e. the rate over time, for selecting stocks that make greater than 10% moves. I know that when using the arbitrary period of 1 week (4 or 5 trading days) this model is consistently outperforming the market at more than 4 times the expected market frequency. So what if I take a look at longer momentum survivors? Can we see decay in performance among the top stock selections? ~ Value & Momentum Breakouts 2017

The frequency percentages remain very similar to returns documented here on Seeking Alpha since 2017 and at rates that greatly exceed the gains of market returns by 2x and as much as 5x in the case of 5% gains.

(Value & Momentum Breakouts)

These percentages reflect the results from 208 MDA breakout selections through 2019 across 52 weeks with 4 stocks selected each week. MDA selections are restricted to stocks above $2/share, $100M market cap, and greater than 100k avg daily volume. An additional Stock Market column was added to compare similar groups that exclude high volatility penny stocks below $2/share.

Conclusion

These stocks continue the live forward-testing of the breakout selection algorithms from my doctoral research with continuous enhancements over prior years. These Weekly Breakout picks consist of the shortest duration picks of seven quantitative models I publish from top financial research that include one-year buy/hold value stocks.

The latest MDA breakout Growth & Dividend stocks for February have been released along with the Highest Positive and Negative Scoring Forensic stocks for February.

All the very best to you and have a great week of trading!

JD Henning, PhD, MBA, CFE, CAMS

Analyst’s Disclosure: I am/we are long FNGD, ERY. 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.

Comments

[axg5068]

Hi JD,

Just subscribed, have been reading some of your articles in the past. Is LRN the only stock pick for the week? Out of curiosity, does your model looking at the current price relative to historical ranges such as the past 3-months, 6 months, etc? Or do you primarily use technical indicators like RSI, Bollinger Bands, and volume levels?

Keep up the great stuff!

Thanks!

[JD Henning]

@axg5068 Welcome! I'll talk to you in the members' area and I hope you benefit greatly!

[yarf01]

Thanks JD

Saw you gave LRN this week. Do you usually keep your short term plays for a week or so? What is your typical sell signal, or I guess what do you rely on more. Percent drop, or are you confident enough in your picks to wait out a 5-8 percent drop before selling?

[JD Henning]

@yarf01 Thanks for your question.

1) I measure all the results posted in the articles each week based on "worst case, buy/hold, do nothing, equal weighted returns" through the close on Friday.

2) It is possible to beat my published returns by reacting to news, events, earnings reports and other changes during the week prior to my fixed measurement period.

3) Members receive live updates and answers to technical conditions based on the MDA momentum parameter changes for timing the best exit decisions.

I rely most on conditional monitoring for the best results, but the fixed returns are the measured results. I offer free presentations and video on timing the exits with a two-week free-trial as well as live chat for update and analysis of any stock.

[mawen]

Have you ever seen the momentum gauge switch from positive to negative then back to positive then collapse to negative in such a short period of time?

[JD Henning]

The signal changes since the end of January 2020 are the most frequent I have seen in over 2 years. 3 signal changes on the Weekly charts and 5 changes on the Daily charts.

This also corresponds to a period where the PBOC injected the most stimulus in a single week in February that it has ever done in over 12 years to prop up China markets. The Fed has eased over $260 billion in less than 18 weeks. It gives the me the sense that the market would correct if the central banks would pause or stop their stimulus efforts. Today we hear the Bank of England and Bank of Japan will also look to stabilize markets with more stimulus soon.

[JD Henning]

First of the 4 MDA breakout picks for members up +10.45% through Monday.

3M up +2.4% this morning.