I am posting some of my technical momentum research data for Seeking Alpha readers to review. I 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 a basket of them helps to lower volatility, while allowing you to sleep at night.
I am equally weighting three indicators in my formula to generate a score: (1) a direct price 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 measurement 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 final 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 professional 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 a great tool for identifying 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.
So, here is a list of the strongest 10% in the S&P 100 index, 10 out of 100. Apple (AAPL), Adobe (ADBE), Amazon (AMZN), Danaher (DHR), Alphabet (GOOG), Home Depot (HD), Johnson & Johnson (JNJ), Microsoft (MSFT), Netflix (NFLX), and NVIDIA (NVDA). The list is full of technology leaders that investors feel can continue to grow during the coronavirus recession and several defensive picks during this bear market phase.
Johnson & Johnson is, traditionally, a great stock to own during recessions and bear markets. It is perhaps the most diversified consumer health care product company in the world, as close to recession-proof as you can get. Danaher is another favorite of investors during recession, holding leading life science, diagnostic supply, and environmental protection businesses. Home Depot has benefited from the stay-at-home orders and the general societal move in 2020 to work on the house and yard while waiting for COVID-19 issues to pass. Netflix has experienced a meaningful bump in viewership and subscriptions, with expectations, customers will be clingy in terms of future revenues. Amazon has been selling and shipping extra goods to the home, as physical stores have been closed. Apple, Microsoft, Adobe, NVIDIA, and Alphabet round out the list of tech stocks under high investor demand in the first half of 2020, as revenues and incomes are expected to be unaffected by the recession or actually rise from all the disruptions taking place in the global economy, as a side effect.
This list is a starting point for more due diligence. The fundamental reasons for bullish action in each are easy to understand. The ADL and NVI lines are very helpful in confirming the current uptrends and accumulation activity. Will the recent performance past remain intact over the immediate future? Maybe, maybe not. However, if you had purchased this group a month or two ago, it would have been a terrific money-making idea.
For the momentum trading crowd, these stocks are ideas to consider buying as part of a diversified portfolio. Don’t be shy about offsetting them against hedges and short sales in other securities. Future strength seems to have higher-than-normal odds, especially if your goal is to find stocks that will outperform further advances or declines in the general market.
Statistically, this is not necessarily an ironclad list of long-term winners. As a group, they represent the kinds of stocks that may continue to rise better than the peer index during coming months. From a day-to-day standpoint, money flows can greatly affect hot and cold group performance. As I am writing this article on June 3rd, The Top 10 are underperforming a sharp rise in small caps and heavily shorted equities, as money flow rotation takes place.
You can review a companion article on the weakest 10 equities using the same momentum formula in the S&P 100 here.
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/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.