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Introduction
This article reviews the Value & Momentum Breakout 2021 trading year and addresses many new changes and enhancements for 2022. The purpose is to review the offered models to see what is working, to anticipate trends for 2022, and to provide an update to last year's article:
I joined Seeking Alpha in 2016 to live forward test my doctoral research and model successful financial algorithms from published literature that have been documented to outperform the markets. After several months and a growing following, in 2017 I was invited to start a Marketplace service on Seeking Alpha to share my ongoing research test models and selection algorithms as a subscription service. Since then I have made many adjustments from my live research testing of documented anomalies and complex models toward a more user friendly and easier experience for members' trading benefit. Value & Momentum Breakouts is still not tailored as an entry level service -- but the process of bridging scholarly research studies toward practical trading advantages are continuously improving with the help of a wonderful and growing community! Our returns are pretty good too!
Year in Review
The S&P 500 ended 2021 up +26.89% with a very large divergence between strong gains in the 500 largest stocks on the index and poor overall performance of the 7,000-plus smaller cap stocks across the three major US exchanges. 2022 will reveal which direction this unusual divergence is likely to close with either underperformance from the largest index stocks or a strong recovery among the many thousands of smaller cap stocks.
S&P 500 Index for 2021 returned +26.89%
(CNN Money)
While the S&P 500 Index remains my primary benchmark for all my portfolios, I also consider the actively managed hedge fund performances closely with the Barclay Hedge Fund Index and Aurum Hedge Fund Index to directly compare active trading performance. In addition, the ARK Innovation actively traded fund run by Cathie Wood has become another popular benchmark that has gained a lot of attention in recent years especially after gaining +152.5% in 2020.
ARK Innovation Fund for 2021 returned -24.01%
(CNN Money)
By way of comparison for 2021 among actively traded portfolios, my Premium Portfolio was the only V&M Breakouts annual portfolio in single digits this year. However despite being my worst performing portfolio for 2021, the Premium Portfolio managed to beat top performing hedge fund Barclay and Aurum indices and the ARK Innovation fund by +31.1%. The Premium Portfolio showed how challenging the markets were for 2021 while delivering compounded annual growth rates of +25.66% and no negative annual returns still beating these other benchmarks since 2018.
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As we begin 2022, my goal again for next year continues not to be the largest service, but to serve our excellent community well with strong value, investment support, continuous enhancements and solid returns. This article reviews all the 2021 results and forecasts the strengths of the models and strategies for 2022.
(VM Breakouts)
Not pictured are the ETF returns from the enhanced Momentum Gauge® test signal and my only long term ETF trade recommendation KOLD from Oct. 5 that's currently up 105.2%. More portfolios are being measured using the Momentum Gauge® signal trades that's generating higher returns in fewer trading days than the benchmark indices.
A Strong Trading Community Makes a Big Difference
Let me begin by first thanking the many great long-term members of our investment community who bring tremendous insight, experience, and recommendation to help all of us succeed in our trades throughout the year. There are so many members I appreciate and who hold my deep respect that I cannot even begin to thank them all personally, including my doctoral advisor and educators who have taught and assisted me over the years. Thank you!
I'm tremendously grateful for the many current member contributions to our community ranging from in depth published analysis to investing wisdom shared daily with other members. An entire section of the Members' Library is devoted to independent member studies submitted to me for publication in order to further improve on the models and trading strategies. Thank you to each of our valued members for making our community one-of-a-kind and a place I love to be every day!
What to Expect for 2022
I think the models I share can be very successful again in 2022, but I make no guarantees or hyped up promises as the markets can humble the proud very quickly. You will always find that my performance results never include hyped up future projections or glorified backtests with alleged thousand percent returns that do not reflect actual realized returns. I believe the compound annual growth rates should speak for themselves. One thing I will never do is promise a "40% compound annual rate of return during the next five years" in an extreme publicity approach that appears to effectively raise a lot of attention and investor capital.
I will continue to do my best to deliver strong results again with the algorithms that have served us well so far. Members should always understand that these different portfolio types are provided to give you a wide selection of asset allocation strategies to produce your own successful portfolio that optimizes your preferred risks and returns.
(Investopedia)
With hundreds of different member preferences ranging from day trading to long term buy/hold stocks to multi-year dividend growth portfolios and exchange traded fund trading it is impossible for me to design a one-size fits all portfolio. As a result I provide the best models I have found over more than 30 years of trading to cover a very wide swath of investment styles. Members should find the portfolio types that best fit your trading risks and your available time to manage each personal portfolio build. Every member has a different experience with my service and that largely reflects each persons involvement and type of portfolios that they use on a regular basis.
I don't pretend to be some great prognosticator of market events and I'm still unable to predict the future. I much prefer to follow where the signals are leading in an inductive statistical approach for the most reliable results. My systematic approach is based on market measurements and my own proprietary Momentum Gauge® model that became a registered trademark at the U.S. Patent Office in 2020. The Momentum Gauges® have gone live in a new automated beta test after many years of research, testing, and analysis and you can sign up for access to the private beta here: Value & Momentum Breakouts - Top Financial Models for Double-Digit Success
(VM Breakouts)
Market Patterns
Several key patterns that I follow relate to market volatility and cyclical market performance patterns. The most time consuming of these patterns are the average daily returns of the S&P 500 tracked daily through each year. The importance of these patterns cannot be overstated as they help us detect market effects to adjust our weekly and monthly trading activity. For example detection of these anomalies help us exploit well documented research of phenomenon like the pre-FOMC announcement drift.
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To illustrate this further in 2020 (left chart below) the Tuesday pre-FOMC drift was extremely strong - more than double any other day of the week, and nearly triple the next best day - as investors expected large Federal Reserve stimulus/intervention announcements on FOMC Wednesdays throughout the year. Thursdays were particularly bad days of the week as we watched jobless claims numbers come out every Thursday morning and pull the average returns lower. Trading weekly breakout stocks on these patterns greatly enhanced returns and reduced downside risks last year.
However these factors were completely different in 2019 (right chart below). Without the massive Federal Reserve intervention of 2020 and the much calmer markets of 2019 we experienced extremely positive Friday anomaly with nearly 50% of all the market returns produced on the last day of the week.
(VM Breakouts)
Moving into 2021 the daily return averages of the S&P 500 shifted again significantly. Instead of the FOMC drift anomaly creating the best Tues/Wed returns we saw nearly the exact opposite of 2019 when the exact opposite of tapering was the talk of the Fed. Now with every Fed FOMC meeting becoming the potential bearer of increased interest rate guidance and stimulus tapering the Tues/Wed returns were the worst average two days of the week in 2021. I anticipate that this 2021 pattern may become amplified and even more negative when the Fed actually begins to raise interest rates and not just taper stimulus but begin quantitative tightening in the coming years.
(VM Breakouts)
Related to cyclical patterns are the monthly election year (below left) and normal seasonality (below right) patterns that have served us very well. Investors are creatures of habit who follow patterns into self-fulfilling prophecies and often pull historical patterns forward in time to try beat less informed investors.
(VM Breakouts)
We continue to experience high reliability of these patterns and investor expectations with September again being one of the worst months of the year this year. The exception to these patterns may be the scope of future stimulus packages and the strength of economic recovery with COVID vaccines in wide distribution.
The volatility model that is measured throughout the year relates to the number of +/- 2% daily moves on the S&P 500. 2020 was an exceptionally volatile and challenging year for the S&P 500 index with more +/-2% daily events than seven prior years combined. 2021 was again exceptionally low volatility for the S&P 500 but much higher volatility for the other indices especially small caps. 2018 suffered high volatility from the Federal Reserve starting Quantitative Tightening programs that reduced liquidity in the markets.
(VM Breakouts)
If I had to guess for 2022 I would expect market liquidity to decline further and contribute to much higher volatility as the Fed begins more restrictive monetary policies after the COVID pandemic crisis.
The Momentum Gauges®
The most important systematic model I use comes from my multiple discriminant analysis (MDA) breakout algorithms and are called the Momentum Gauges®. So far this indicator has correctly called every significant market change since its general inception in 2017. The signals are being enhanced further with the addition of the S&P 500 Momentum Gauges® and 11 Sector Momentum Gauges® that I expect will provide increased forecast reliability into 2022.
(VM Breakouts)
The Market Momentum Gauges® and S&P 500 Momentum Gauges® have gone live in a new automated beta test after many years of research, testing, and analysis and you can sign up for free access to the private beta here: Value & Momentum Breakouts - Top Financial Models for Double-Digit Success.
What to look for in each portfolio for 2022
The following forecasts are tailored to each portfolio type in anticipation of improving economic conditions with higher employment levels, declining Covid impact and hopefully some declines in high rates of inflation. Trading emphasis for the new year will be tailored for each type of portfolio consistent with the parameters, rules, and characteristics unique to each algorithm and model.
1. The Premium Portfolio
The Premium Portfolio followed its best year ever at +47.48% in 2020 with only single digit gains in 2021 up +7.11% and not beating the S&P 500 for the first time in four years.
- The Premium Portfolio compound annual growth rate CAGR of +25.66% compares favorably to the S&P 500 of +15.55% CAGR from 2018.
- The Premium Portfolio has managed positive returns in every year of active trading with strong downside protection from the model.
- Returns on the Premium Portfolio in every year have been obtained in at least 10 fewer trading weeks than their benchmark S&P 500 index and Hedge Fund benchmarks.
Following the Momentum Gauge® signals helps the Premium Portfolio move into cash to avoid significant downturns. In 2020 the Premium Portfolio +47.5% beat the S&P 500 while staying in cash for 19 weeks avoiding the record -33% declines in the index. In 2019 the Premium Portfolio also beat the S&P 500 while spending 14 weeks in cash and in 2018 the portfolio sustained its +20.8% gains by avoiding the large Q4 market correction.
Some additional discussion and performance charts are in the Year in Review section above.
2. Weekly MDA Breakout Picks
One of the most popular models of my service and the basis for the forward test of my research that brought me to Seeking Alpha are the weekly MDA breakout picks. Members should remember that these are weekly selection portfolios for high frequency breakouts of 10% or more at rates approximately 4x higher than the broader market average of equivalent stocks. At member requests performance is shown as annual returns by adding each weekly performance result together. The weekly returns could be compounded for each separate weekly portfolio returns in yet another measurement approach for much higher returns that might look too much like performance distortion.
These selections rely on the statistical models behind the multiple discriminant analysis that categorize the conditions of stocks along a momentum cycle of characteristics. These stocks are picked from the total count of Segment 6 stocks that form the positive daily score of the Momentum Gauges®. If I were to again offer breakdown stocks for shorting, I would pick from among the count of Segment 2 stocks that form the negative daily score of the Momentum Gauges®.
(Value & Momentum Breakouts)
These documented high frequency gains in less than a week continue through 2021 at rates more than four times higher than the average stock market returns against comparable stocks with a minimum $2/share and minimum $100 million market cap. The enhanced gains from further MDA research in 2021 are both larger and more frequent than in all previous years except 2020 as shown below.
(Value & Momentum Breakouts)
These stocks will track the strong positive momentum conditions as they change over time through 2022 and particularly on Fridays when they are chosen for members. I still publish selections during negative Momentum Gauge® conditions for research purposes, but time and independent member testing has shown that the strongest results occur during positive signals and on weeks with the negative Momentum Gauges® below 40 value.
3. The Piotroski-Graham Value Portfolio
(Value & Momentum Breakouts)
The next model to beat the S&P 500 again through 2021 is the Enhanced Piotroski-Graham Value portfolio that returned +32.21%. 8 of 10 of the January 2021 selections ended the year positive led by DCOM +121.6%, DSSI +45.5%, COWN +39.6%, KBH +33.3%, WMK +37.7%.
Every year selections are made for long term buy/hold value investments. In prior years I would release portfolios every two months alternating with the forensic portfolios, but I have reduced the frequency now down to every six months or two times per year. The idea is to provide low risk, high-value opportunities that give members yet another way to find some strong stocks to buy that don't require high frequency trading, daily monitoring, or constantly checking to see if technical conditions are holding up for gains over the coming year.
The scholars who developed these distinct value selection models are Benjamin Graham, considered the father of value investing, and Joseph Piotroski a Stanford Professor whose model has withstood decades of peer review testing to outperform other value models. For the benefit of members, I have combined these two algorithms from these scholars and added my own enhancements to limit stocks selections above $2/share and 100k average daily trading volume. The results have been highly positive, but have lagged the momentum based portfolios during recent periods of very high stimulus activity.
4. The Forensic Negative Value Portfolios
The fourth portfolio type I offer that has consistently outperformed the S&P 500 benchmark is the forensic negative value portfolios. These long-term buy/hold portfolios were offered every two months in prior years alternating with the Piotroski portfolios. I have reduced the frequency now down to every six months or two times per year.
(Value & Momentum Breakouts)
These stocks have their own set of unique characteristics and it's quite amazing to me how well they have performed over time. The stocks do not follow the Momentum Gauge® signals and are measured entirely on a buy/hold long term basis through the worst market conditions of every year. It is very likely that following the Momentum Gauge® timing signals could further enhance these returns and reduce downside risk.
5. The Forensic Positive Value Portfolios
The fifth portfolio type I offer that has consistently outperformed the S&P 500 benchmark is the forensic positive value portfolios up +32.9% for 2021. Similarly to the negative portfolios, these long term buy/hold portfolios were offered every two months in prior years alternating with the Piotroski portfolios. I have reduced the frequency now down to every six months or two times per year.
(Value & Momentum Breakouts)
The negative forensic portfolios may be outperforming positive portfolios according to my working theory as described in a past article:
It may reflect that higher financial irregularities could be related to management's willingness to take higher risks in anticipation of off-book opportunities, pending FDA approvals, or favorable mergers/acquisitions only on management's radar screens.
Each of the scholars' algorithms are designed for application over at least a one-year period and in the case of Ohlson's scores the probabilities were determined over a two-year test period. Not only are these powerful forensic tools excellent checks and models for buying stocks, but they were instrumental in analyzing the credibility of whistleblower claims:
- Top Forensic Algorithms Check Whistleblower's $6B Claims Against Disney
- Top Forensic Algorithms Check Whistleblowers' Allegations Against Infosys
- Running Top Forensic Algorithms On 2012-2019 GE Financials
- US Fraud examiner says forensic algorithms show no evidence of financial wrongdoing at Infosys
- Top Forensic Algorithms Check Published Fraud Allegations Against iQIYI (NASDAQ:IQ)
6. The Bounce / Lag Momentum Index Portfolios
The next portfolio to beat the S&P 500 through 2021 are the weekly Bounce/Lag Momentum stocks provided by Professor Grant Henning as a bonus selection model now exclusively provided to subscribers. These are also high frequency weekly breakout selections designed for large short term gains with a new portfolio released every week. In order to measure annual returns as a preferred view for members, each weekly results are conservatively added together. Another fair approach to these weekly returns would be to compound the weekly gains for potentially much higher return results.
(Value & Momentum Breakouts)
The breakout frequencies are not nearly as high as the MDA breakout selections, but overall returns are more consistent using a weekly 5 stock selection model. The +71.05% returns of Grant's Bounce/Lag Momentum model beat the MDA Breakout model this year using the same application of the Momentum Gauge® signals.
A very high percentage of Grant's selections have also reached the multibagger list on the V&M Breakout Spreadsheet with over 100% gains and as much as 1,400% in less than two years. 
(Value & Momentum Breakouts)
Some members pointed out that his two previous Bounce/Lag Momentum books were published five years apart and he was due for a third installment. So Grant has taken this to heart and shifted his time from writing public articles toward completing another trading book for 2021. Cancer treatment and glaucoma surgery the past two years also slowed down my father's schedule, but thankfully he is back to full health and at work on his book and research for a planned release of his next trading book in 2022.
Unlike the MDA Breakout stocks that are based on statistical measures using discriminant analysis to identify top performing variables, the B/LM stocks rely on statistical ranking methods to provide the strongest conditions for momentum continuation.
Financial Engineering: Ranking The Ranks For Bounce/Lag Momentum Validity
These Bounce/Lag Momentum selections are expected to continue into 2022 exclusively for subscribers as a bonus model for as long as Grant is willing and able to share his weekly trading selections with us.
Image source: The Value and Momentum Trader: Dynamic Stock Selection Models to Beat the Market (2010)
Trading Stocks by the Numbers; Financial Engineering for Profit (2015)
7. The Bull / Bear ETF Combination Signal
Another one of the most popular and most profitable models are the Bull/Bear ETF trading signals. This fund based trading model has the potential for very large gains and very high volatility swings as the Momentum Gauge® signals change based on market conditions throughout the year. Numerous bull/bear fund combinations beat the S&P 500 in 2020 and again in 2021.
Top results in 2021 resulted from pairing Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X Shares (GUSH) +47.3% with bear fund Direxion Daily FTSE China Bear 3X Shares (YANG) +68.4% for +115.7% annual returns. For a 4th consecutive year the bull/bear combination of MicroSectors FANG+ Index 3X Leveraged ETN (FNGU)/(FNGD) continued with the top average annual returns of +48.9% on the Momentum Gauge® signal.
4-Year Compound Annual Growth Rate of ETF Combo Returns
(Value & Momentum Breakouts)
7. b. Enhanced Test Signal ETF Combo Returns
Eight ETF combinations are currently being tested using an enhanced signal described in more detail in the methodology section below. Again, these results reflect the combination trading using the MG® test signal compared to the best return from either pair of funds using the buy/hold approach. The four-year test signal returns through 2021 are shown in yellow in the chart above and three year returns are shown below:
(Value & Momentum Breakouts)
The individual bull fund returns using the Test Signal for 2021 outperformed in every signal case and the enhanced test signal may soon become the primary return signal.
(Value & Momentum Breakouts)
This live enhancement study continues in order to deliver the best possible and most reliable return results on fund combination trading. One of the most significant results is the size of the drawdowns that are avoided in these risky 3x leveraged funds.
- Over the past three years, every leveraged fund without the Momentum Gauge® signal has an average max drawdown of over -50% and as high as -88.3% average declines for both UVXY and SOXS.
- None of the funds using the Momentum Gauges® had an average max drawdown greater than -30% the past three years. The worst three-year average so far has been SOXS (-3x Semiconductor bear fund) with -29.4% drawdown.
8. Sector ETF Trading Returns
Eleven non-leveraged sector ETFs are being measured from 2018 using the same Momentum Gauge® signals. A number of these funds beat the S&P 500 again and have the potential to outperform uninformed buy/hold approaches by using the signals to outperform again. Now that the Momentum Gauges® have finally been automated, I next plan to move toward activating the Sector Momentum Gauge® signals that correspond more directly to each sector to see if we can further enhance the following results:
(Value & Momentum Breakouts)
- All of the sector fund annual compound growth rates for the last 4 years are positive using the Momentum Gauge® signal.
- The Momentum Gauge® signal returns were accomplished in 690 positive signal days compared to 1,185 days using just the buy/hold approach with no signal.
- Using the gauges delivers similar or better results in 495 fewer trading days and much smaller drawdown declines.
Members are also free to act on the Momentum Gauge® signal changes that may occur intraday, at the close of the day, or using the weekly signal for higher confidence. Each of these timing periods introduces a different risk between acting too soon on inaccurate noise or too late in order to achieve more confirmation. For the purpose of all published returns the signal used is the close of the day with a transaction on the next available day of trading.
9. The 5G Segment Portfolio of 32 stocks
This portfolio was first created in 2020 at the prompting of members of the Value & Momentum Breakout community who wanted additional insight into the 5G sector. Originally 33 stocks were in the portfolio in 2020 but declined to 32 stocks following the Sprint and T-Mobile merger. In 2020 there were 21 stocks out of 33 that gained over 20%. For 2021 we had 19 stocks gain over 20% with top returns 2 years in a row from (NVDA) gaining +125.3%. Additional top gainers include (MRVL) +84%, (AMAT) +82.3%, and (NOK) +59.1%
The same 32 stocks continue for the 5G Segment Portfolio for 2022.
Top 5G Opportunities For 2021: Re-Evaluating 32 Stocks In 5G After 32.4% Average Annual Returns
(Value & Momentum Breakouts)
10. The Growth & Dividend MDA Breakout portfolio
Back in 2019 some members expressed that despite all of the different portfolios, models, and selections offered there was still a sizeable gap in my stock selections. To address that gap in 2020 I created the new Growth & Dividend MDA Breakout portfolio with more focus on high-dividend mega-cap growth stocks.
(Value & Momentum Breakouts)
These large cap dividend stocks also beat the S&P 500 last year almost in every portfolio selection in 2020 not even including the high dividend returns from each stock. The one-year return of the January 2021 portfolio delivered 23.06% annual gains (not including dividends) and all five stock selections ended the year positive. Ameriprise Financial (AMP) led the portfolio with +55.2% gains and Toronto-Dominion Bank (TD) with +35.9% not including large dividends. The 2021 end of year report card results are detailed below:
V&M Breakouts: Top Growth And Dividend Stocks For December 2021
These selections fill a key gap and focus on the 730+ stocks well above $10 billion market cap range combined with strong dividend offerings. This segment represents about 10% of the available stocks on the US exchanges, but the vast majority of the invested capital in the markets.
11. The New ETF Active Trading Portfolio
Once again, members have found another area in my service offering that has not been covered yet and they have asked that I deliver an actively traded portfolio of ETF/ETN funds with buy/sell signals. This new request will essentially put my trading skills to the test against the Momentum Gauge® signals for the Combo and Sector fund returns.
(Value & Momentum Breakouts)
I plan to use every trading advantage at my disposal including the Momentum Gauges® and even the Sector Momentum Gauges® while they are still being beta tested. One distinct advantage I may have is toward long term trades like ProShares UltraShort Bloomberg Natural Gas (KOLD) that has been a buy since October 5th with 105.2% returns. Certain trades in commodity funds may have no relationship to the equity based gauges and long term positions can be highly rewarding.
The funds to start the portfolio will be selected through an alert to members on January 3rd, but members already know that my KOLD trade will be represented in the start of the portfolio. The long term trading outlook is best viewed on the 12-year chart of KOLD with Natural Gas at peak price levels and beginning a long term descent to average price levels last seen pre-pandemic.
(FinViz)
Based on probabilities and past peak pricing behaviors I expect KOLD to continue as a highly profitable trade into summer of 2022.
(FinViz)
Other Segments
In 2020 the number of portfolios and models expanded significantly as I tested even more ways to find alpha across very different strategies. Other studies and portfolios have faded more into the background with research articles available to members. Some of these prior portfolios and studies are described below:
- A live forward test of the CFO insider trading anomaly confirmed the significant short-term advantages from financial literature of following CFO insider trades closely. This factor has now become a key consideration in certain stock selections. As an added feature the latest SEC Form 4 (Insider CFO Buys & Sells) are now regular updates for members.
- The past integration of Dual Momentum Theory concepts prompted me to apply my Momentum Gauge® trading signals to Bull/Bear ETF combinations with remarkable success. This feature has been carried over and expanded into 2022 with more than a dozen ETFs and many more customizable trade combinations.
- For 2021 I ran a fourth test on the Russell 3000 anomaly portfolio. Once again I found very inconsistent results that did not support published peer-reviewed research at the trading level. This anomaly will be retired from my tracking sheet even though it generates high levels of interest every year. 3 Month Update: Evaluating The 2021 Russell Index Rebalancing Anomaly | Seeking Alpha Marketplace
- While past returns have been very large there has not been the kind of consistency that I would consider statistically reliable beyond a 3 month period. Members are encouraged to consider this opportunity every year in June when the Russell index is rebalanced.
- A similar finding of a lack of consistent results has also retired my multi-year research into the "Tesla Test" forensic anomaly: 10 Largest Stocks Failing The 'Tesla Test' On Forensic Scores For May 2021 | Seeking Alpha Marketplace
Thank you again!
I remain very blessed to see the interest and growth in my service and I trust that 2022 will provide another great opportunity for all of us to benefit together in the markets.
Thank you for being a valued member and for making our community a great place to engage with talented and friendly people every day!
All the very best!
JD
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