Stock rank/Momentum trading ideas

Friday, Feb 03 2017 by
20

5894df6e23c07Momentum_trading.png

5894df79c53d3Momentum_trading_2.png

I'm looking for a trading strategy and i'm open to opinions and discussion.

My criteria is simply:-

Stock rank >= 90

Momentum >= 95

Spread <=500

Market cap <= 800

Reset every month.

The screener generated 14 stocks on January2nd and generated a 14.7% return in one month.

The average spread was 1.29% leaving a very healthy profit.

All the shares still qualify for February so no transaction costs this month.


My theory is that the high momentum figure will drive the shares in the very short term i.e 30 days. The high stock rank will add some robustness whilst filtering out the weak.


thoughts???


Disclaimer:  

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25 Posts on this Thread show/hide all

lightningtiger 4th Feb 6 of 25

Thanks for the information folks. Now everything is working OK. I have just been watching a great DVD called The Secret Kingdom with Pat Robertson of the 700 Club, available on site. It explains how laws work, with regard to finance covering laws of use, persistence, expectation, compound interest & reciprocity and more to help us all prosper.

Over the last few weeks they have been bringing in over $1M a week! So it certainly works.
Most of the money goes all over the world to help other people that are less fortunate than us.
I remember a while ago when people were asking him where they should put their money & he said "put it with good companies that pay a good dividend of around 6% interest" and I have not forgotten that.
Hence the selection of collecting a 30p dividend with GAW which works out at about 3.5% (30p/836p) for the taking.
It will be interesting to see how the search continues through FEB. Certainly worth monitoring. If it continues at that rate that is over 200% in a year.

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gpacker 4th Feb 7 of 25

The other aspect I would like to see is not only the momentum rank figure but the trend of the momentum figure over a set period.
I.E. I may select a stock at 95 momentum however 2 months earlier it may have been 99 and is a decreasing trend. Ideally I want to select 95 momentum rank that was previously 90 2 months earlier showing an improving trend.
Momentum within momentum if you like.......

Is this possible?

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Ramridge 5th Feb 8 of 25

Hi gpacker -
excellent piece of work. A great example of Occam's Razor - the principle that simpler solutions should always be preferred to complicated ones.
Couple of observations.
- you might try adding a filter such as PEG<1. But I guess that this might already be within the formula that calculates the Momentum Rank
- as the rebalancing is throwing up the same stocks, it will be fascinating to see what growth you experience for February

A pity that stocko does not give us the tools to back test your method.

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good2bme 6th Feb 9 of 25

Hi GPacker,

Very interesting ideas here, I'd be interested in finding out how you open a position and how you exit a position.

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LE4R 6th Feb 10 of 25

Gpacker, to echo others, thanks for sharing your thoughts and an interesting potential strategy.

One thought I had when reading - will January turn out to be a bit of an outlier? As the month is quite busy for trading updates following Dec Y/Es, the announcements are likely to be at least partially responsible for the strong 14.7% return here... aside from just momentum per se. (NB. I haven't looked to see when the reporting date is for each of these 14 stocks.) It will be interesting therefore to see how the strategy fares over the forthcoming months, especially ones that are typically quieter for news flows.

That said, you might argue that the high momentum scores at the beginning of the month partly reflect the market's expectation that any forthcoming TUs would be positive - so perhaps it's somewhat circular!

Does that make sense - or am I over-complicating things?!

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Ramridge 6th Feb 11 of 25

Just an afterthought. Even if your Feb performance is half your Jan performance, say 7% , that is still huge for one month's gain.

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Ramridge 6th Feb 12 of 25
1

Here is an analysis which I would like to share with this thread, since the idea came from this source.

The question is, how much of the SP momentum over 1 month gets carried on in subsequent months?

To test this statistically, I did the following
- identify the top 20 growth stocks in a particular month
- calculate average % growth
- calculate the same group's average performance for each of the following 3 months

My database consisted of all LSE shares except oilers and minerals and investment trusts; and market cap between £10m to £1000m

Here are the results

5898799a50c66Picture2.jpg

The general conclusion is that strong growth in a particular month tails off pretty quickly.

June 2016 looks peculiar and I think that might have to do with the Brexit vote when markets moved up significantly post Brexit.

Of course, there is no re-balancing here. So the fact that gpacker's method re-balances every month should in theory make a positive difference.

Interesting, I think.

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gpacker 6th Feb 13 of 25

Thanks for the feedback all, I will keep posting performance here to see how it goes.
Another consideration I have is to include European stocks too to widen diversification. i.e if a uk stock falls out the criteria at the end of the month I will replace with a European until it is evenly balanced.

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BH1991 6th Feb 14 of 25
2

Hi gpacker,

I have a very similar strategy to yours and I'm up 32% in three months! My strategy places more emphasis towards value & momentum though.

My criteria are as follows:

  • QVM StockRank >= 90
  • Value Rank >=60
  • Market Cap >= £20m
  • RS 6M >= 30
  • RS 1Y > 0
  • Spread <= 400
  • ROE % > 0 

Sort by descending RS 6M and select the top 10 stocks. Re-balance monthly.

From my experience so far, the strategy works very well as long as your disciplined on spreads. I tend to exclude stocks less than £20m which gets rid of the illiquid nano caps. I think you should also include a ROE > 0 as an extra layer of protection. This helps me cut out "Value and Momentum" traps. A perfect example of this is Capital Drilling (LON:CAPD), which doesn't make a profit.

What metric do you sort the stocks by? (Sorting my six months relative strength worked very well for me). 


Ben

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gpacker 6th Feb 15 of 25

Thanks Ben, no sorting required because there were only 14 stocks. however this may change when I introduce European stock......
Point taken above 20m but I also like a maximum as I believe they are easier to move with momentum.

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BH1991 6th Feb 16 of 25

In reply to gpacker, post #15

Yes, expanding to European stocks will give you a much broader choice. I'm subscribed to the UK but I am thinking of expanding into Europe and the U.S.

I agree with the weighting towards small caps, they certainty outperform over the long run. So far, very few large cap stocks have qualified for this screen. The only one I can think of was HSBC Holdings (LON:HSBA), but it didn't qualify on the day of re-balancing.

However, I did some retrospective back testing with a few stocks under £20m (simply looking at the historical Stockopedia reports manually). Sopheon (LON:SPE)could have qualified and subsequently multi-bagged 

So I could be missing out on a few gems by having a £20m cut off point... I guess I will just have to join the party later, with these stocks!

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rhomboid1 6th Feb 17 of 25
1

In reply to BH1991, post #14

Hi Ben

I hold Capital Drilling (LON:CAPD) from half the current price & i think you may have missed its key attributes, they're gearing up their business & their rigs to reflect a massively improved macro environment, so today they raised revenue forecasts by more than 20% for 2017, I'd say they're better set now than at any time since I bought in , rig utilisation is the key metric and that in Q4 is at a recent high.

Cheers

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BH1991 6th Feb 18 of 25
1

Hi rhomboid1,


It certainly looks like I missed a trick here. The stock has risen c.33% since I first started my portfolio in November and I would have held it for the entire three months.

In hind sight I should have bought the stock, but I wanted to be extra safe with a profitability metric.

Two reasons which put me off are:

  1. The stock isn't profitable which falls under my definition of "Jam Tomorrow"
  2. The dividend yield is high but very poorly covered. I was worried that it's not sustainable and the company would simply burn through its cash reserves. A shock dividend cut could destroy the momentum.

All the best with Capital Drilling (LON:CAPD) though! I hope to take advantage of the resurgent mining & energy sectors in 2017. I will be monitoring Capital Drilling for sure!

Ben

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Mechanical Bull 7th Feb 19 of 25
5

I have had a go at back testing this screen on Sharelockholmes. I couldn’t replicate it exactly, as the bid spread criteria is not present (although with a market cap limit over 800M I doubt this makes much difference). More problematic is that the minimum period for assessing performance, is 3 months and so I can’t say exactly what the performance looks like if the strategy was reset every month.

The average 3 month returns point to performance over the longer term being less successful than a simple 90+ StockRank type strategy. Also, the variance was high - more than twice – so it is also higher risk.

Although it is likely that the strategy works better on paper with a one month reset, this would inevitably result in more churn and higher transaction costs. Bid spreads, stamp duty and broker fees will cut into profits, and so this kind of strategy needs to outperform lower churning strategies to actually be worth the candle.

It would be interesting to see how this pans out longer term but I would urge caution before throwing too much money into this.

Blog: Mechanical Bull Blog
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gpacker 7th Feb 20 of 25

its impossible to replicate a backtest against this on sharelockholmes?

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Mechanical Bull 7th Feb 21 of 25
1

In reply to gpacker, post #20

Sharelockholmes allows backtesting of screens against quaterly snapshots going back to 2003, This makes it difficult to test how they perform over periods of less than three months. However, I generally find it a very useful resource for testing out new ideas.

Blog: Mechanical Bull Blog
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Ramridge 7th Feb 22 of 25

In reply to Mechanical Bull, post #21

Does Sharelockholmes have all historical data of StockRanks, Momentum Ranks, Basic Ranks and Crossover Ranks to allow you to back test?

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gpacker 8th Feb 23 of 25

Hi, no it doesn't unfortunately I looked myself yesterday.

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Mechanical Bull 8th Feb 24 of 25

Sharelockholmes do have their own equivalents of QVM StockRank factors (including crossovers). The combined QVM is called the "Market" score These will not produce exactly the same results as StockRanks but I think you can consider it a close enough proxy. Here is a comparison of the two strategies with a 3 month reset:

589aea06a84e7QVM.JPG

Blog: Mechanical Bull Blog
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gpacker 8th Feb 25 of 25

Thanks MBB.

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