I thought I would put out some of my technical momentum research results for Seeking Alpha readers to review. I generally sort the components of different indexes, at various time intervals, using a number of indicators of strength and weakness. For a simpler creation, this article will look at the S&P 100 index, some of the largest U.S. corporations publicly traded. I am using a 6-month time period, which has some predictive value in determining outcomes 1-3 months into the future. Of course, reversals in fortune happen in this group. So, owning/shorting a basket of them helps to lower volatility, while allowing you to sleep at night.
I am equally weighting three indicators to generate a score: (1) a direct performance comparison to the S&P 100 index, (2) changes in the daily Accumulation/Distribution Line, and (3) fluctuations in the daily Negative Volume Index.
In terms of momentum, the clearest picture of winning/losing is to review price change over time vs. a peer index. In this instance, the S&P 100 [$OEX] U.S. mega-cap index is our sort group. Relative price strength or weakness is the name of the game for portfolio construction, so that will be our first sort criterion over a 6-month span. 3-month and 6-month periods hold some of the best predictive value, using nearly seven years of real-time research and over 400 model portfolio constructions of different variables.
The second sort criterion for this exercise will be the Accumulation/Distribution Line (ADL). The ADL is a recording of how high or low the closing price prints inside the daily trading range. If the stock closes near the high of the day, we can say buying happened during the session. If it closes nearer the low, we can extrapolate that selling took place. While not a perfect indicator of future price direction, this historical record of recent patterns in trading activity has proven useful when part of a larger formula.
The last part of today’s momentum ingredient list is the Negative Volume Index (NVI). This indicator only counts price change multiplied by trading volume on falling volume days vs. the last session. Definitely a unique generator of what buyers/sellers are doing on quieter days for news, if you will. The theory is serious investors and traders will give us better clues of buying and selling trends vs. the emotional crowd on high volume, more news-filled sessions. Future stock price gains/losses can, and do, happen with no advance warning from the NVI. However, the NVI is one of my favorite for finding changes in trend and measuring the underlying health of a stock, more often than not. A basket of blue chips usually performs as predicted by abnormally strong or weak NVI signals the next 3-12 months.
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This article will focus on the weakest 10% of the index, 10 out of 100. Many of them have been mentioned in previous bearish posts over the last several months. The list includes American International Group (AIG), Boeing (BA), Citibank (C), DuPont (DD), Ford (F), General Electric (GE), Occidental Petroleum (OXY), Simon Property (SPG), United Parcel Service (UPS) and Wells Fargo (WFC).
Sharply underperforming bank/financial and deeply cyclical sectors are well-represented by AIG, BA, C, DD, F, GE, OXY, UPS and WFC, all hurt by the 2020 recession and uncertainties about the economic recovery timing and strength. Simon is a REIT suffering from a horrific leasing environment in its shopping mall-focused portfolio of assets during the destruction of physical retail with the coronavirus economic shutdown. Occidental is being hit hard by the oil bust and excessive debt loads. Boeing is witnessing a collapse in demand for commercial aircraft, and perhaps soon for military orders (as governments are about to slash spending to balance budgets). AIG, Citibank and Wells Fargo are the weakest mega-capitalization banks and financials using the three indicators of momentum trend and underlying technical health. DuPont, Ford, General Electric and UPS round out the sluggish manufacturing and transportation sectors.
This list is a basic starting point for more due diligence. The fundamental reasons for weakness in each are easy to understand. The ADL and NVI lines are very helpful in confirming the current downtrends. Will the recent performance past remain intact over the immediate future? Maybe, maybe not. Liquidating this group a month or two ago in favor of an investment in the overall index or the strongest-performing selections would have been a terrific money-making idea.
For the momentum trading crowd, this is a list of ideas to consider selling or shorting as hedges against your longs in a diversified portfolio. Future weakness seems to have higher-than-normal odds, especially if your goal is to find stocks that will underperform further advances in the general market. Again, statistically, this is not necessarily an ironclad list of long-term losers. As a group, they represent the kinds of stocks that may continue to perform worse than the peer index during the next few months.
If you decide to short any of the selections, please understand that borrowing shares to sell involves greater risk than a long-only approach to investing. You can lose more than you invest initially if good news propels a stock higher unexpectedly. I suggest shorting a number of individual stocks from different industries, with your capital mainly as a hedge against your investments on the long side. Smaller short positions and a net-neutral to long portfolio design overall will keep your bearish picks from ruining performance when one or more invariably reverse and “outperform” the market.
I am writing a companion article on the strongest 10 equities in the S&P 100 next.
Thanks for reading. Please consider this article a first step in your research process. Consulting with a registered and experienced investment advisor is recommended before making any trade.
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Disclosure: I am/we are short BA, SPG, F. 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.
Additional disclosure: This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author’s opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author’s best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.