Week 41 MDA Breakout Forecast: Short-Term Picks To Give You An Edge

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 177 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 more than 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. A frequency comparison chart is at the end of this article.

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 average 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 at +220.42% compared to the S&P 500 +3.64% over the same period. The very best case perfectly timed returns at +440.5%, and in the worst case, fixed buy/hold, do nothing, equal-weighted average returns year to date, the returns are +0.33%.

So far YTD, 62 stock selections in the past 39 weeks have gained over 10% in less than 5 days with 32 of those short-term picks gaining over 15% and one pick as much as +132.6%. 2020 MDA picks are on track for much higher breakout frequencies than last year’s results as shown at the end of this article. 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 +11.01% and worst case average +0.01% 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 8 prior events numbered below relate to the Momentum Gauge topping signals on the S&P 500 chart below. These forecasted market tops are detailed in my recent article: An Election Year Correction Signal And Only The 3rd Negative Weekly MG Signal In 2020

Over the years, the evidence is clear that timing your investments during the most positive momentum periods greatly enhances your weekly returns.

(Value & Momentum Breakouts)

Market Conditions into Week 41

Tuesday continues with historical patterns well documented in published research as the best day of the week, especially in weeks with FOMC meetings. Research studies discussed in the Members’ Library show that this is a pricing behavior patterned on the Fed’s strong intervention activity called pre-FOMC drift. Last year with less Fed intervention, Fridays were by far the best day of the week.

The S&P 500 index delivered the last high volatility ±2% move on Sept. 23rd. Use caution as volatility tends to group in frequency. There have now been 42 daily moves greater than ±2% on the S&P 500 since February, including daily moves as large as -11.98%. These are more daily +/- 2% moves than the years 2012, 2013, 2014, 2015, 2016, 2017, and 2019 COMBINED. If the second half of 2020 continues like the first half, we will have more record volatility days than 2008 during the financial crisis.

We can confirm the Fed sold -$28.6 billion in domestic securities this week, down significantly from $43.9 billion the prior week 39. This is generally unfavorable to the markets and the largest tightening of the Fed’s balance sheet since May of 2019. This starts to reduce the total easing to around $2.5 trillion in liquidity this year. The Federal Reserve’s balance sheet is at the highest level in US history to over $7.2 trillion.

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

The Weekly Momentum Gauge continues negative in a pattern somewhat similar to the January/February topping pattern with 2 down signals and an up signal in between. The Fed’s declining stimulus activity is shown in dark blue from the SOMA holdings report above.(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 – October 2: Markets Sharply Lower On Pres. Trump And 1st Lady Testing Positive For COVID. Fed Sold -$28.6 Billion In Securities This Week.
  • V&M Breakout Morning Update – September 30: Markets Lower With DJIA -150 And S&P 500 Below Key 3320 Support, USD And VIX Surging Again.
  • V&M Breakout Morning Update – September 28: Markets Higher Premarket With Asia Rally And Hopes On New $2 Trillion Stimulus Bill With VIX Still Elevated Over 30.

The Week 41 – 2020 Breakout Stocks for next week are:

The selections this week consist of two Healthcare, one Technology, and one Communication Services sector stock based on strong Friday scores. The markets were highly negative at the open Friday on news of the US President testing positive for COVID and the selections reflect the strong Work-From-Home stocks that broke out early. Developments on the multi-trillion dollar stimulus package or the President’s health may greatly affect the performance of these stocks in the week ahead. These stocks are released to members in advance every Friday morning.

  1. Alpha Pro Tech (APT) – Industrials / Build Products & Equipment
  2. Zoom Video (ZM) – Communication Services / Telecom Services

Alpha Pro Tech – Industrials / Build Products & Equipment

Price Target: $20.00

(Source: FinViz)

Alpha Pro Tech, Ltd., together with its subsidiaries, engages in developing, manufacturing, and marketing a line of disposable protective apparel and infection control, and building supply products in the United States and internationally. The company operates through two segments, Building Supply and Disposable Protective Apparel. The Building Supply segment offers construction weatherization products, such as house wrap, synthetic roof underlayment, and other woven materials. The Disposable Protective Apparel segment provides shoe covers, bouffant caps, gowns, coveralls, lab coats, hoods, and frocks, as well as face masks and face shields.

(Source: StockRover)

Zoom Video – Communication Services / Telecom Services

Price Target: $550.00

(Source: FinViz)

Zoom Video Communications, Inc. provides a video-first communications platform in the Americas, the Asia Pacific, Europe, the Middle East, and Africa. The company’s product portfolio includes Zoom Meetings that offers HD video, voice, chat, and content sharing through mobile devices, desktops, laptops, telephones, and conference room systems; Zoom Phone, an enterprise cloud phone system that provides secure call routing, call queuing, call detail reports, call recording, call quality monitoring, voicemail, switch to video, and other services, as well as inbound and outbound calling services; and Zoom Chat enables sharing messages, images, audio files, and content in desktop, laptop, tablet, and mobile devices for meeting and phone customers.

(Source: StockRover)

Top Dow 30 Stocks to Watch for Week 41

Applying the same MDA breakout model parameters to only 30 stocks on the Dow Index 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 in pairs for the last 5 weeks:

Symbol Company Current % return from selection Week
(JNJ) Johnson & Johnson +0.86%
(PG) Procter & Gamble +0.85%
(MRK) Merck & Co. -5.75%
(CAT) Caterpillar -1.97%
(NKE) Nike +8.31%
(MCD) McDonald’s +2.34%
(JPM) JPMorgan Chase & Co. -5.44%
(AXP) American Express Co. -3.84%
(WMT) Walmart +0.88%
(KO) Coca-Cola Co. +1.02%

If you are looking for a much broader selection of mega-cap breakout stocks beyond 30 Dow stocks with detailed analysis and strong returns, I would recommend the Growth & Dividend MDA Breakout picks released monthly for long-term total return:

The Dow Pick for Next Week

Walmart Inc.

Walmart Inc. is a prior selection from among the 30 Dow stocks with the price cycling back into potential breakout conditions in the positive price channel. All the technical and sentiment indicators are improving again and setting up for a move within the channel from key support levels to retest prior highs above $150/share.

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.

Top Piotroski-Graham Long Term Value Stocks: Mid-Year 2020 Selections are up +16.41% as value continues to hold up well led by LEN-B +50.6% and MTH +56.5% in the homebuilder sector.

The actively traded V&M Premium Portfolio is up +20.0% YTD and remains in cash equivalents following the negative Momentum Gauge signals.

All the very best to you, stay safe and healthy and have a great week of trading!

JD Henning, PhD, MBA, CFE, CAMS

Disclosure: I am/we are long SPXU, FNGD, TECS. 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.