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 139 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.

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 the multiple 10% gainers in a single week. More than 150 stocks have gained over 10% in a 5-day trading week since this MDA testing began in 2017.

Momentum Breakout Stock Portfolio 2019 results YTD

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. The MDA selection process is detailed in many reference materials showing the screening process to approximately 40 initial choices per week with 4 stocks finally selected from over 7,800 available stocks across the US exchanges each week.

(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. The graph above compares the average weekly S&P 500 gains YTD against the best case and worst case average returns of the top weekly breakout gains YTD.

These returns continue to outpace the S&P by over 3.5x after nearly 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 over 120% since inception.

The signals remain highly positive from the last October 15th buy signal and you can see how these 4 events above relate to the Momentum Gauge tops shown below. Timing your investments during the most positive momentum periods greatly enhances your weekly returns. Additionally, the Friday positive anomaly has been a very key factor accounting for more than 50% of all the gains in the S&P 500 YTD 2019.

(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 page now includes many more combination trades sets as promised:

  1. MicroSecotors FANG+ 3x Index bull/bear (FNGU)/(FNGD) +177.43%
  2. Direxion Daily S&P 500 3x bull/bear (SPXL)/(SPXU) +107.47%
  3. SPDR S&P 500 (SPY)/ ProShares SHort S&P 500 (SH) +31.89%
  4. Alpha Architect Intl Momentum (IMOM)/Dorsey Wright Short (DWSH) +37.31%
  5. ProShares UltraPro Nasdaq 3x bull/bear (TQQQ)/(SQQQ) +123.64%
  6. Direxion Daily 3x Small Cap bull/bear (TNA)/(TZA) +130.21%
  7. Direxion Daily 3x Biotech bull/bear (LABU)/(LABD) +117.14%
  8. MSCI 3x Emerging Market Index bull/bear (EDC)/(EDZ) +38.97%
  9. VIX Index 1.5x bull/bear (SVXY)/(UVXY) +99.07%

Market Conditions into Week 3

The Friday positive anomaly remains strong and delivered nearly 50% of all the gains on the S&P 500 in 2019. So far into 2020, Thursday has been the most positive day and Friday has been the worst day primarily due to events in the Middle East last week. (Value & Momentum Breakouts)

Fed intervention delivered easing of $18.8 billion on Wednesday, Jan. 8th, that brings easing back in 11 of the past 12 weeks. This brings the total easing to $169.0 billion in liquidity just over the past 12 weeks. Fed easing was a very positive condition for the markets between 2009-2017, 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 chart shows confirmation of a positive momentum signal from Oct. 15th on the daily momentum chart. We are seeing our second consecutive week of positive momentum declines and a rise in negative momentum levels last seen in October. This could be an early market topping signal. Final confirmation occurs when the red line crosses above the green line on the chart.

(Value & Momentum Breakouts)

The more detailed Daily Momentum Gauge chart below is reserved for members and has been expanded to more closely examine the past 3 months. The Momentum Gauges closed Friday after-hours at 79 Positive and 26 Negative. We have been on a very extended bull run with very positive scores continuing. These movements and signals were updated in more detail through the Daily Update articles this past week:

  • V&M Breakout Morning Update – Jan. 10: Fed Eased $18.8 Billion Wednesday And Stocks Up To New Highs With S&P 500 At 3,284 And Dow 28,982 Premarket
  • V&M Breakout Morning Update – Jan. 9: Stocks Up To New Highs S&P 500 At 3,268 And Dow 28,860 Premarket
  • V&M Breakout Morning Update – Jan. 8: Stocks Rebounding Again After Iranian Missile Attack Overnight With S&P 500 At 3,240
  • V&M Breakout Morning Update – Jan. 7: Stocks Rebounding As Middle East Fears Recede And Oil Declines
  • V&M Breakout Morning Update – Jan. 6: Iran Escalation Fears Send Gold To 7-Year Highs And Brent Crude Oil Above $70.

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 3 – 2020 Breakout Stocks for next week are:

The Week 3 stocks consist of three Healthcare and one Technology sector stock. These picks were up over 2% on Friday led by CALA that already broke above 10% for members in the advance release and has more room to run.

  1. Calithera Biosciences (CALA) – Healthcare / Biotechnology
  2. Simulations Plus (SLP) – Technology / Business Software.

Calithera Biosciences – Healthcare / Biotechnology

Price Target: $8.00

(FinViz)

Calithera Biosciences, Inc., a clinical-stage bio-pharmaceutical company, focuses on the discovery and development of small molecule drugs directed against tumor metabolism and tumor immunology targets for the treatment of cancer in the United States. Its lead product candidate is CB-839, an inhibitor of glutaminase, which is in Phase II clinical trial to treat solid tumors. The company also offers INCB001158, an oral inhibitor of arginase that is in Phase I/II clinical trial for the treatment of hematology and oncology.

Simulations Plus – Technology / Business Software.

Price Target: $42.00

(FinViz)

Simulations Plus, Inc. develops drug discovery and development software for mechanistic modeling and simulation, and machine-learning-based prediction of properties of molecules from their structure worldwide. The company offers GastroPlus, which simulates the absorption, pharmacokinetics (PK), pharmacodynamics, and drug-drug interactions of compounds administered to humans and animals; DDDPlus that simulates in vitro laboratory experiments that measure the rate of dissolution of the drug and additives in a dosage form; and MembranePlus, which simulates laboratory experiments.

Top Dow 30 Stocks to Watch for Week 3

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 can provide some strong additional basis for investors to judge future momentum performance for mega-cap stocks in the short- to medium-term.

Last week the picks were Chevron Corp. (CVX) and Exxon Mobil Corp. (XOM) as events in the Middle East caused oil stocks to dominate the breakout screener in an outside event on the day of selection. After rapid deescalation of events, oil prices suffered their largest one-week drop since early last year. External market events play a significant and unpredictable role in market conditions. This week conditions returned to prior technology and healthcare risk-on sectors that we had in Week 1 with Apple Inc. (AAPL) and Pfizer, Inc. (PFE) gaining.

The Dow pick for next week is:

Pfizer Inc.

Pfizer is in a positive channel from August on strong momentum and positive investor sentiment. Indicators are still showing early setup for breakout above $40/share resistance to prior highs in the coming days. Watch for more confirmation and a strong move higher in the near term.

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.

These momentum picks are different from the Weekly Bounce / Lag momentum picks with a 2% trailing stop loss methodology by Prof. Grant in his weekly selections. The Bounce / Lag picks gained 4.80% in Week 2 with two stocks gaining over 10%, but selections are now no longer provided publicly in a weekly article and remain a private feature along with the Premium Portfolio.

New MDA breakout Growth & Dividend stocks have started for 2020 and will be tracked over the coming year!

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

JD Henning, PhD, MBA, CFE, CAMS

If you are looking for a great community to apply proven financial models with picks ranging from short term breakouts to long term value and forensic selections, please consider joining our 400+ outstanding members at Value & Momentum Breakouts

Disclosure: I am/we are long FNGU. 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.

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2020-01-11