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 159 weeks of public selections as part of this ongoing live forward-testing research.

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 monthly Growth & Dividend MDA breakout stocks. I now provide 6 different ways to beat the S&P 500 since my trading studies were made public.

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.

How the Momentum Gauge trading model works

I am revealing additional insights into the gauges to help readers better understand how I use this model to consistently beat the S&P 500 and protect investments. Members of my service receive much more information and background on this system including my doctoral research and presentation materials. The links in the introduction section above will also help you greatly.

The Momentum Gauges work as a broad measure of all the stocks on the major US exchanges that are either in the outlier conditions of high positive breakout or high negative breakdown conditions. By comparing these two segments from my research, I can model where the strongest market directional forces are acting as a leading indicator. This can also be applied at the sector level when the market is not acting in a broad rally and some sectors are still in strong breakout conditions.

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The Momentum Gauges turned positive again on April 23rd, for the first positive signal in two months. Since the change in signal, the S&P 500 has gained +8.75%. The broad market entered conditions nearly consistent with Positive Acceleration condition Segment 6, although some sectors remain in weaker momentum conditions. The best approach is a sector analysis using the Momentum Gauges provided during the week to members.

The Seven Segments of the Momentum Cycle

Each of these segments is identified by comparing the positive and negative scores from my research model that is run many times a day. Those scores are shown on the Momentum Gauge charts later in the article.

  1. Segment 1 – Negative Reversal includes the Breakdown Signal that occurred on Feb. 24th that shows a sudden early change in market direction. This is detailed most recently here: Revisiting The Signals That Forecasted Every Recent Decline, In Search Of Early Recovery Indicators
  2. Segment 2 – Negative Acceleration was the overall market condition from the negative signal on Feb. 24th to the lows in March before the Federal Reserve intervened with the large stimulus packages in US history.
  3. Segment 3 – Negative Control is a phase with negative market conditions and declines that are small and steady involving much less accelerating type declines.
  4. Segment 4 – Non-Momentum phase is when the overall market may be in the process of changing direction or is stalled out with very little cause to either rise or fall. In this condition, the positive and negative Momentum Gauge scores would be nearly even and/or both relatively low.
  5. Segment 5 – Positive Control is the condition of a positive market with slow and steady gains that do not involve many large positive accelerating gains.
  6. Segment 6 – Positive Acceleration is the strong positive bull market condition where gains are large and accelerating at a record pace with high net inflows into the market. In these conditions, nearly any stock will deliver positive returns as a strong market exuberance or FOMO buying behavior becomes common.
  7. Segment 7 – Positive Reversal involves a key breakout reading on the Momentum Gauges that confirms a positive reversal market change in direction on the daily and/or weekly charts.

2020 YTD Breakout Portfolio Returns

The Breakout Picks are high volatility selections for short-term gains, but with no selections below $2/share, under 100k avg daily volume, or less than $100 million market cap. The returns were at +41.50% in the first 9 weeks of 2020, consistent with exiting the portfolio following the negative Momentum Gauge signal of Feb. 24th (red weeks below).

The cumulative average returns YTD are +94.87% compared to the S&P 500 -5.77% over the same period. The very best case timed returns at +199.3%, and in the worst case, fixed buy/hold, do nothing, equal-weighted returns through Week 22, the returns are -22.7%. So far YTD, 30 stock selections in the past 22 weeks have gained over 10% in less than 5 days, with 11 of those stocks gaining over 19% and as high as +77%. I have removed the best case returns from the chart below as it begins to distort the chart between the very worst possible returns and the actual S&P 500 returns shown below.

(Source: Value & Momentum Breakouts)

The best case average weekly returns are +9.66% and worst case average -1.03% YTD as shown below. These returns include trading against all the Negative Momentum Gauge signal warnings which increases your risk of declines, but are conducted without interruption for testing and measurement purposes.

(Source: Value & Momentum Breakouts)

You can see how each of the 7 prior events numbered above relate to the Momentum Gauge topping signals shown below. These forecasted market tops are detailed in my recent article as we look for a new positive reversal signal:

Revisiting The Signals That Forecasted Every Recent Decline, In Search Of Early Recovery Indicators

Over the years, the evidence is clear that timing your investments during the most positive momentum periods greatly enhances your weekly returns. We have recently experienced a new Positive Momentum Gauge signal on April 23rd that may mark a longer-term recovery point.

(Value & Momentum Breakouts)

Market Conditions into Week 23

Tuesday continues with historical patterns well documented in published research as the best day of the week, especially in weeks with FOMC meetings and the current POMO schedule. Every day of the week except Tuesday and Wednesday continues with negative average returns YTD. Research studies discussed in the Members’ Library show that this is a pricing behavior patterned on the Fed’s strong intervention activity. Last year, Fridays were by far the best day of the week.

Extreme volatility continues into 2020 now with 34 daily moves greater than +/- 2% on the S&P 500 in just the past 3 months. These are more daily +/- 2% moves than the years 2012, 2013, 2014, 2016, 2017, and 2019 combined. Fortunately, we have not had a move greater than +/- 2% in 8 trading days for the longest duration of relative calm since prior to the Feb. 24th correction. It is highly unlikely that this extreme volatility is over as we head into Q2 with some of the worst economic GDP forecasts since at least 1943.

Today, we can confirm the Fed reduced -$7.6 billion in assets from their balance sheet this week for the first time since the first week of January 2020. While US Treasury purchases continued higher by $20 billion, the sale of nearly $28 billion in mortgage-backed securities reduced their balance sheet by a net -$7.6 billion. Combined, this brings the total easing to around $2.32 trillion in liquidity in just the past 6 months. The Federal Reserve’s balance sheet remains near the highest level in US history to over $7 trillion.

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

The Weekly Momentum Gauge chart shows continued positive conditions from the Apr. 27 crossover signal as well as some strong relationship with Fed stimulus activity. The Weekly Momentum Gauge chart below also shows the Fed’s massive easing activity in dark blue. This week saw a significant net drop in easing down from $110.9 billion last week.

(Value & Momentum Breakouts)

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 MDA momentum gauges have correctly called every major market direction change since they began. The more detailed daily Momentum Gauges are reserved for members of my subscription service. These movements and signals were updated in more detail through the Daily Update articles this past week:

  • V&M Breakout Morning Update – May 29: S&P 500 Above 3,030 Ahead Of Trump Press Conference On China Today As Fed Net Assets Decline In First Week Since January
  • V&M Breakout Morning Update – May 28: Jobless Claims Today With S&P 500 Moving Above 3,040 And Momentum Gauges Highly Positive.
  • V&M Breakout Morning Update – May 27: S&P 500 Above 3,027 And Dow Above 25,350 With Momentum Gauges Highly Positive.
  • V&M Breakout Morning Update – May 26: S&P 500 Exploding Above 3,000 And Dow Up 500 Points In Breakout Approaching 25,000 With Momentum Gauges Highly Positive.
  • Monday was Memorial Day and markets were closed.

The Week 23 – 2020 Breakout Stocks for next week are:

The selections consist of three Healthcare and one Industrial sector stock. Sample selections for this week are:

  1. Alexco Resource Corp. (AXU) – Industrials / Waste Management
  2. Meridian Bioscience Inc. (VIVO) – Healthcare / Diagnostics & Research

Alexco Resource Corp. – Industrials / Waste Management

Price Target: $3.00

(Source: FinViz)

Alexco Resource Corp. engages in the mineral exploration, and mine development and operational activities primarily in Yukon Territory, Canada. The company explores for silver, lead, zinc, and gold deposits. It owns interests in the majority of the historic Keno Hill Silver District project that comprises the Flame & Moth, Bermingham, Lucky Queen, Bellekeno, and Onek deposits, as well as 725 quartz mining leases, 873 quartz claims, 24 placer mining claims, one quartz mining license and 50% of three quartz mining leases, and two crown grants 50% of three quartz mining leases covering an area of 233 square kilometers located in Yukon Territory.

(Source: StockRover)

Meridian Bioscience Inc. – Healthcare / Diagnostics & Research

Price Target: $20.00

(Source: FinViz)

Meridian Bioscience, Inc., a life science company, develops, manufactures, distributes, and sells diagnostic test kits primarily for various gastrointestinal and respiratory infectious diseases, and elevated blood lead levels worldwide. The company operates through Diagnostics and Life Science segments. The Diagnostics segment offers testing platforms and technologies, including real-time PCR amplification under the Revogene brand; isothermal DNA amplification under the Alethia brand; rapid fluorescence-based immunoassay platform under the Curian brand; rapid single-use immunoassays under the ImmunoCard and ImmunoCard STAT! brand names; enzyme-linked immunoassays under the PREMIER brand; and anodic stripping voltammetry, an electrical chemical sensor platform for quantitative determination under the LeadCare and PediaStat brands.

(Source: StockRover)

Top Dow 30 Stocks to Watch for Week 23

Applying the same MDA 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. The most recent picks of weekly Dow selections:

Symbol Company Current % return from selection
(RTX) Raytheon Technologies +6.47% (4 days)
(TRV) The Travelers Companies +5.82% (4 days)
(UNH) UnitedHealth Group +4.77%
(MRK) Merck +1.18%
(NKE) Nike +9.64%
(AXP) American Express +8.14%
(MSFT) Microsoft +4.97%
(V) Visa +11.20%
(CVX) Chevron Corp. +5.39%
(XOM) Exxon Mobil +3.98%

The Dow pick for next week is:

UnitedHealth Group Inc. (UNH)

UnitedHealth has been a prior Dow breakout pick this year, gaining +47.56% from first selection through today. The stock has been consolidating in the $280-$300 range for over a month and looks to be setting up for a strong breakout higher to all-time highs. Short-term indicators are all favorable and net positive for the first time since late March and a move to $320/share appears likely.

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.

My general Market Outlook was released early last week to members for the SA Roundtable Edition and my views have not changed as the market recovers primarily on record levels of stimulus.

The June MDA breakout Growth & Dividend stocks have now been released. The April portfolio and other prior monthly long-term selections continue higher as the market improves.

The V&M Premium Portfolio gained again this week and is up +3.19% YTD and more than 8% ahead of the -5.77% S&P 500 YTD.

All the very best to you, stay safe and healthy 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 700+ outstanding members at Value & Momentum Breakouts

Disclosure: I am/we are long NAIL, LABU, SOXL, BNKU. 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.