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.
Performance of Last Week's Picks
Last week's two stock picks gained an overall average of 2.84% 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 loss of 3.78% 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 lost 0.08% in what turned out to be a challenging week for momentum stocks.
|Stock Pick - Week 16||Weekly Gain (Loss)||Weekly Gain(Loss) with 2% Stop-Loss*|
|Invitae Corporation (NVTA)||(12.62%)||(0.01%)|
|SharpSpring, Inc. (SHSP)||5.07%||5.69%|
*A word is needed about the use of stop-loss orders. Formal stop-loss orders provide a temptation to market makers to "take out the stops" when there is little trading volume. For this reason, it is often better to set a mental sell price and execute it when the market reaches that point. Several of you have accurately noted that some of the picks that trigger a stop-loss sell return to favor within a few days. Therefore, it can be more profitable at times to avoid stop-loss sales altogether. 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 than to suffer a large loss if the stock falls and does not return. Note that this just a matter of personal trading style, and it does not work well at all times for all persons. In the case of NVTA listed above, it has now fallen completely off my watch list.
Another reason for possibly using 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.
Comparative BLM/S&P 500 Performance through 16 Weeks of 2019
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 Bounce/Lag Momentum stock picks have more than tripled the performance of the S&P 500 Index. BLM 16-week composite gains of 59.11% compare favorably with S&P 500 composite gains of 16.82%, 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 gains of 136% 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.
Next Week's Market Conditions
Last week was challenging for momentum stocks, and next week is likely to be challenging as well, although perhaps not quite so challenging. That is why no stocks were found by the BLM algorithm to exceed the critical BLM score of 30 for this coming week. One useful 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 portend a positive outlook, whereas values below one imply negativity. As you can see in the following chart for the S&P 500 Index, the RSI Index now stands at only 67.05, but the MFI Index is at a higher score of 70.50. The ratio 67.05/70.50 is 0.951, which is below 1.00. Therefore, I look for some downward market movement in the coming week. It may be a good to move to less risky portfolio positions.
A Look at Next Week's BLM Picks
For next week, because of deteriorating conditions for momentum stocks, the BLM algorithm has not found any stocks, from among over 5,000 stocks surveyed, with a qualifying BLM score above 30. Note that a BLM score above 30 is normally required to qualify as a weekly pick. However, because the BLM scores are relative rankings, I have decided to present the five highest scoring stocks in hopes that overall market conditions improve and some of these stocks do come into play.
|Stock Pick - Week 17||B/LM Score||Combined Ranking|
|Coca-Cola Consolidated Inc. (COKE)||28.07||1|
|Cinedigm Corp. (CIDM)||23.49||2|
|SharpSpring, Inc. (SHSP)||20.07||3|
|ACM Research, Inc. (ACMR)||19.61||4|
|Great Lakes Dredge & Dock Corporation (GLDD)||19.12||5|
Charts of each of these picks are available below. 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, along with the fact that their BLM scores are lower than normally required, that extreme caution is warranted in each case.
Coca-Cola Consolidated, formerly Coca-Cola Bottling Co. Consolidated, produces, markets and distributes nonalcoholic beverages. The Company is an independent Coca-Cola bottler in the United States. The Company's segments include Nonalcoholic Beverages and All Other. Majority of its total bottle/can volume to retail customers consist of products of The Coca-Cola Company (NYSE:KO). It also distributes products for various other beverage brands, including Dr Pepper, Sundrop and Monster Energy. The Company's product offerings include both sparkling and still beverages. Sparkling beverages are carbonated beverages, and the Company's principal sparkling beverage is Coca-Cola. Still beverages include energy products and noncarbonated beverages, such as bottled water, tea, ready-to-drink coffee, enhanced water, juices and sports drinks. There are two main categories of sales, which include bottle/can sales and other sales. This company is not to be confused with Coca-Cola beverage company of the Dow 30, whose performance has not been so attractive.
Cinedigm Corp. is a distributor and aggregator of independent movie, television and other short form content managing a library of distribution rights to thousands of titles and episodes released across digital, physical, and home and mobile entertainment platforms. The Company also provides digital cinema assets servicing on over 12,000 domestic and foreign movie screens. It operates through four segments: first digital cinema deployment (Phase I Deployment), the second digital cinema deployment (Phase II Deployment), digital cinema services and media content and entertainment group. It collaborates with producers, brands and other content owners to market, source, curate and distribute content to targeted audiences. It distributes content through existing and emerging digital home entertainment platforms and packaged distribution of DVD and Blu-ray discs to wholesalers and retailers and mortar storefronts. It also operates a branded and curated over-the-top entertainment channels.
SharpSpring, Inc. is a cloud-based marketing technology company. The Company offers SharpSpring, a marketing automation solution for small and medium-sized businesses and is primarily sold to marketing agencies that use the platform on behalf of their clients. The features of SharpSpring include web tracking, lead scoring and automated workflow that enables businesses deliver the message to the customer. SharpSpring marketing automation solution also offers customer relation management tool and call tracking functionality. Its SharpSpring Mail+ provides customers with marketing automation functionality and traditional email marketing capabilities. SharpSpring Mail+ offers tools, such as automated workflows, triggered emails and dynamic list segmentation. The Company's subsidiaries include SharpSpring Technologies, Inc., InterInbox SA, ERNEPH 2012A Ltd. doing business as ISMS, Quattro Hosting LLC, SMTP Holdings S.a.r.l and InterCloud Ltd.
ACM Research, Inc. develops, manufactures and sells single-wafer wet cleaning equipment, which semiconductor manufacturers use in manufacturing steps to remove particles, contaminants and other random defects in fabricating integrated circuits, or chips. The Company's Ultra C equipment is designed to remove random defects from a wafer surface, even at an advanced process node (the minimum line width on a chip) of 22 nanometers or less. Its equipment is based on its Space Alternated Phase Shift (SAPS) and Timely Energized Bubble Oscillation (TEBO) technologies. Its SAPS technology uses alternating phases of megasonic waves to deliver megasonic energy to flat and patterned wafer surfaces in a uniform manner on a microscopic level. Its TEBO technology provides cleaning for both conventional two-dimensional (2D) and three-dimensional (3D) patterned wafers at advanced process nodes.
Great Lakes Dredge & Dock Corporation is a provider of dredging services. The Company provides dredging services in the East, West and Gulf Coasts of the United States and around the world. It operates in two segments: Dredging Operations, which involves enhancement or preservation of navigability of waterways or the protection of shorelines through the removal or replenishment of soil, sand or rock; and Environmental & Remediation Operations, which provides construction services on soil, water and sediment for clients in both the public and private sectors. It has interest in Amboy Aggregates, which is involved in mining sand from the entrance channel to New York Harbor for providing sand and aggregate for use in road and building construction, and for clean land fill; Lower Main Street Development, LLC (Lower Main), which is engaged in land development and sale business; and TerraSea Environmental Solutions (TerraSea), which is engaged in the environmental services business.
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. Traditionally, however, I have avoided these stocks because they do not usually produce my targeted 10% monthly growth. Recently, however, there have been some exceptions - particularly through discreet application of margin trading.
Last week's three Dow 30 picks showed positive performance. Cisco Systems (CSCO) gained 0.20% on the week, Visa (V) gained 0.33%, while Procter & Gamble (PG) gained 1.95%. This represents an average gain of 0.83%, which when fully margined would yield 2.73%. This means that the leveraged Dow 30 picks strategy surpassed the BLM strategy and the leveraged ETF strategy this past week.
My four Dow 30 picks for next week along with their pre-leveraged year-to-date percentage gains are Procter & Gamble 16.28%, Microsoft (MSFT)21.98%, Cisco Systems 31.16%, and Disney (DIS) 20.79%. The rationale for their selection is that these four stocks were found to rank highest of the Dow 30 stocks in a six-index combined-rank analysis. The indexes included momentum, value, and growth factors.
Although these stocks tend to fall short of my 10% monthly growth target, they do have some safety advantages for the long term. However, when fully margined, they can easily satisfy my personal growth standards as well.
Next Week's Leveraged ETF Picks
For this coming week, four ultra ETFS have year-to-date percentage gains approaching or exceeding 100%. These are the VelocityShares 3x Long Crude Oil (UWT) 144%, Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares (UBOT) 107%, Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL) 99%, and ProShares UltraPro 3x Crude Oil (OILU) 141%. These four funds comprise the ETF picks for this coming week. ETF picks are decided by a combination of growth ranking and BLM-score ranking.
This past week's two ETF picks: UWT gained 0.60% and OILU gained 0.25%. Although such ultra ETFs are already fully leveraged, it is possible to augment their gains (or losses) by an additional 10% by purchasing them on margin. It is apparent that the leveraged ETF strategy was not as profitable as the leveraged Dow 30 strategy for the past week.
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 of comparative ranking of those stocks. Computations proceed throughout each trading day, but these results are posted weekly through this medium.