The Weekly Breakout Forecast continues my doctoral research analysis on MDA breakout selections over more than five years. This subset of the different portfolios I regularly analyze has now reached 167 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 six different ways to beat the S&P 500 since my trading studies were made public.
Remarkably, the frequency streak of 10% gainers within a four- or five-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 five-day trading week since this MDA testing began in 2017.
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 nine 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 +165.3% compared to the S&P 500 -0.47% over the same period. The very best case timed returns at +330.9%, and in the worst case, fixed buy/hold, do nothing, equal weighted returns through Week 30, the returns are -0.35%.
So far YTD, 48 stock selections in the past 30 weeks have gained over 10% in less than five days with 18 of those short-term picks gaining over 19% and one as high as +132.6%. 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 +11.03% 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 eight prior events numbered above relate to the Momentum Gauge topping signals shown below. These forecasted market tops are detailed in my recent article:
Over the years, the evidence is clear that timing your investments during the most positive momentum periods greatly enhances your weekly returns. We most recently experienced a Positive Momentum Gauge® signal in July that is tracking the market to four-month highs.
(Value & Momentum Breakouts)
Market Conditions into Week 31
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 move on June 26th and we are in the second longest stretch without a 2% or greater daily move this year. There have been 38 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, 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 eased $34.7 billion this week in domestic security purchases down from $59.5 billion the prior week, but at relatively high levels. This brings the total easing to around $2.56 trillion in liquidity just the past seven months. The Federal Reserve’s balance sheet is at the highest level in US history to over $7.2 trillion.
The Weekly Momentum Gauge® chart shows continued positive values from the buy signal back in week 18. The Weekly Momentum Gauge® chart below also shows the Fed’s easing activity in dark blue from the SOMA holdings report with more small increases in Fed activity.
(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 – July 24: Markets Lower Over Continued US-China Tensions And S&P 500 Rebounding From Overnight 3200 Retest.
- V&M Breakout Morning Update – July 23: Markets Continue Higher With S&P 500 Above 3270 Ahead Of Weekly Jobless Claims Data At 8:30am ET
- V&M Breakout Morning Update – July 22: S&P 500 Holding Above 3240 June Resistance At 4 Month Highs With Precious Metals In Strong Rally
- V&M Breakout Morning Update – July 21: S&P 500 Clears 3240 June Resistance On Run To 4 Month Highs With Strong Tuesday Effect On Deck.
- July 20th returned from vacation.
The Week 31 – 2020 Breakout Stocks for Next Week
The selections this week consist of two Basic Materials, one Consumer Defensive, and one Industrials sector stock. These stocks are released to members in advance every Friday morning and already reached gains of over 2% led by RADA +4.1% and DRD +4.5% with still more room to run.
- DRDGOLD Ltd. – Basic Materials/Gold
- RADA Electronic Industries – Industrials/Aerospace & Defense
DRDGOLD Limited, a gold mining company, engages in surface gold tailings retreatment business in South Africa. The company’s activities include exploration, extraction, processing, and smelting. It recovers gold from surface tailings in the central and western Witwatersrand basin in Gauteng province. The company was founded in 1895 and is headquartered in Johannesburg, South Africa.
RADA Electronic Industries Ltd. develops, manufactures, markets, and sells defense electronics to various air forces and companies worldwide. It offers military avionic systems, including flight data recorders for fighter aircraft; digital video/audio/data recorders; high definition digital video/audio/data recording for fighter and trainer aircrafts; a range of head-up-displays color video cameras for fighter aircraft; and various ground debriefing solutions.
Top Dow 30 Stocks to Watch for Week 31
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 in pairs for the last five weeks:
|Symbol||Company||Current % return from selection|
|(INTC)||Intel Corp.||-15.68% bad reaction to Q2 earnings Friday|
|(PG)||Procter & Gamble||+9.31%|
|(IBM)||Intl Business Machines||+2.21%|
If you are looking for a much broader selection of mega-cap breakout stocks with detailed analysis and strong returns, I would recommend the Growth & Dividend MDA Breakout picks released monthly for long-term total return:
- The July MDA Breakout Growth & Dividend stocks currently up +4.04% through July (not including high dividends) with all picks positive. The August MDA Breakout Growth & Dividend stocks come out next week.
The sample Dow Pick for Next Week
Verizon posted both strong revenue and earnings beat on Friday and is set to break key resistance at 58/share that has held since February. High net MFI inflows and positive indicators show short-term breakout is underway on very good fundamentals and current value. A move to prior highs around 62/share is likely into Q3.
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 four 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.
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.
All the very best to you, stay safe and healthy and have a great week of trading!
JD Henning, PhD, MBA, CFE, CAMS
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Disclosure: I am/we are long NAIL, SOXL, TECL, YANG, NUGT. 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.