Momentum Monday 1st May

30th Apr '23 by Elio D'Amato

10 comments 713 reads

Welcome to the new and revamped Momentum Monday

Here is the format for the revised report:

Broader market sentiment
Member Corner
Stocks in the “Shine Zone”
52 week high screen (including changes)

I will include a description at the top of each section which will highlight the intention and how the information should be digested. Be sure to read them. As always, you don’t have to read everything, just go to the sections that are of interest to you.

Hopefully you enjoy the new format. Be sure to let us know your feedback down below and hopefully we can continue to support those of you that apply a Momentum elemnent to your investing moving forward.

And don’t be shy. Please interact with us. This service will only be as powerful as what you contribute.

Broader Market Sentiment

Here we look at market direction (both in the US and ASX). This is not to determine an entry or exit signal… We should always rely on individual charts of stocks to do that. But rather to understand how aggressive/cautious traders should be when considering individual stocks.

We have split the discussion for each region into Chart sentiment and Macro sentiment so that the two remain separate. We have included discussions around macro sentiment because, rightly or wrongly, they move markets.

S&P500

Chart sentiment

The market finished the week by peeping it head above the HH and therefore our next target is now 4280.

S&P500 Weekly chart

The pleasing thing to note has been that this is now the second short term higher high meaning the index is going on a little gallop and my initial goal of 4180 looks like it will be broken (hopefully). The Weekly RSI is above 50 and MACD is positive.

S&P500 Weekly since 1 July 2022

We can buy into global equities with support at 3840.

Macro sentiment

We finished the week with news of another potential Bank Failure in the form of First Republic and the release of another key inflation figure, the personal consumption expenditures index (which excludes food and energy) rose 0.3%. Markets widely…

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NicholasB

30th Apr '23

Thanks Elio. The new format looks promising. I did like your technical analysis/review of a handful of stocks in the previous format. I'd like that to be re-included if possible (more work for you though). Also I'd like to hear views on OM Holdings (ASX:OMH) please... It goes ex-div on Friday this week.

Elio D'Amato

1st May '23

Thanks NicholasB, I will still do the stock discussions, however they will be member driven and limited to two. Feedback we received was that the article was a bit long and that something more akin to the new "Shine Zone" would be more of value... but as always we are evolving so thank you for your feedback.

But yes, we can't do both... besides the length... the sheer amount of content would mean releasing on Monday would be an unrealistic timeframe. As far as I know, I don't think there is a service as comprehensive as ours from a Momentum perspective and this is only one piece of the total Stockopedia offering.

In the interests of time given the yield is due soon I will cover OMH now... (but in a another comment). For the benefit of everyone else, future requests will be looked at next week or beyond. keep the feedback coming!

Julian H

Thank you Elio. Very Valuable, very efficient

Jonner

An explanation on how you apply Liquidity and On Balance Volume (OBV) would be good.

I really liked reading your momentum journey, while its not necessary to footnote, there is alot of academic background underlying. I'm not on the momo journey yet myself. But stories like Nicolas Darvas are interesting. And Soros "positive feedback loops" or reflexivity is the core that powers mo...

Reflexivity is a theory that positive feedback loops between expectations and economic fundamentals can cause price trends that substantially and persistently deviate from equilibrium prices.
Reflexivity’s primary proponent is George Soros, who credits it with much of his success as an investor.
Soros believes that reflexivity contradicts most of mainstream economic theory.

Investing in irrational exuberance in a normal (tightening) liquidity environment against the mean of equilibrium - good luck with that.

If you are a concentrated investor, opening an initial position at 1% of portfolio is a bit low imo, however in terms of making risk adj for macro factors atm I'd come to about =< 1% myself. See blue portion graph below. Thanks for the reflecting reminder. Factoring in a size of a position whereby ratio is maintained (not nominal consistency). (Kelly Criterion - a scientific gambling method now incorporated into portfolio management).

PLEASE READ MY COMMENT IN A PREVIOUS REPLY BELOW TO SEE WHY I AM REPLYING HERE

OM Holdings (ASX:OMH) is a long established maker of all things Manganese based out of Singapore. To keep a very long story simple, the price of Manganese has been rank over the past year and bit as Chinese activity since COVID has either been reducing or under speculation that it will reduce. Manganese is used in steel to make it stronger in the form of ferroalloy. (It is also used in pure form for Lithium Ion batteries as a Cathode - but that is only small at the minute.

And while reports are starting to emerge of China's re-opening and the steel furnaces running once again, margins are being squeezed for Manganese producers due to soring energy costs and OMH is one of those. OMH have also had an issue with one of their manganese alloy smelters not being operational - these are expected to come online soon. Further in April the first silicon metal furnace was stopped on account of not meeting expectations.

The company released an updated statement regarding its ongoing dividend policy in early Feb which it too was a little underwhelming (10% - 30% of NPAT capped at 50% FCF). At 2 cents I don't expect there to be a major impact on price. Obviously the price of Manganese and the resolving of their operational issues will be more important. As will any potential scale benefits that could come from Latrobe Magnesium (ASX:LMG) opening a smelter next door.

The problem with OMH from a Momentum perspective is that it can be very lumpy in terms of liquidity. The stock since the mini peak in February has not been able to sustain itself. The breach of December higher low, means a target of $0.59 comes into play. OBV declining also has supported the recent sell down showing sentiment is on the downside.

And it will really need to hold that level. Otherwise there are some big downside targets. If we look at a 5 year chart that would mean $0.25, and even worse if it breaches below that.

As with most charts, rarely will it be a straight line down (though it can happen) therefore there may be opportunities for a more elegant exit. But the momentum of this stock is down and it needs Manganese to get somewhere closer to early 2022 highs to find the love again.

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The author holds interests in stocks highlighted in the data tables . This position can and will change at any time without notice.

Thanks Jonner and I hope others appreciate the effort you went into or your post. My method is part science, part art, part "making enough mistakes to be classified as an expert" .

There is a reason why behavioural economics/finance (aka scientific gambling) is starting to engage much of academic literature...

However I hate to be pragmatic and say that a tribesman of the Serengeti would have told us the same thing our esteemed wise ones have, as they have observed the Wildebeest do the same thing for generations.

Running as a group in right direction is the best chance they have in making it to the next watering hole. Sure the occasional laggard gets eaten by the Lion, but the group as a whole survives and thrives.

As for the concentrated investor... bet on the bigger faster beast, Thanks again.

As for how I apply Liquidity, this is very different as an individual vs a fund manager vs my trading strategy vs my conviction strategy. As a rule of thumb as a DIY investor, even if I really like the business, liquidity has to be 2x times greater than any position I take. From a trading perspective (when I need to get in and out like a cat burglar) this increases to 5x... maybe more (depending how much risk I am taking.)

As for OBV I don't look for anything, actually what I look for is what not it there. The way the calc works is in theory when the price goes up, the OBV should follow as the calc simply balances of volume on up days vs down days, and when there is more volume of up days vs the volume on down days, this implies that support is coming into the stock in terms of volume.

The normal state for OBV is to act in parallel with price.

What I am looking for is when an uptrend in price is not supported by a rising OBV. This suggests that while the price might be rising, the volume on the sell days implies a large cohort exiting on strength. Same as when I see a falling price, if OBV is rising it suggests that heavy volume is coming in bargain hunting despite the price fall.

Appreciate that Elio, outstanding value you add. Maybe I should get around to learning to screen.

2nd May '23

Thank you Elio, very helpful. I'm still trying to get the hang of incorporating/reconciling macro data (like your analysis above) with a stock ranking of 97, value 98 and quality of 88.

Fair question.... I think the easiest thing for me to say is "Don't", because what our StockRank system does (quite deliberately) is try to place that macro data whereit needs to be and just to highlight the number important to a specific style/factor of investing. Remember Momentum Monday (this report) only looks after investors who look at using the momentum (aka noise) to make a trade. Think of it this way:

- Quality (is it a sound business?)

- Value (is it a cheap business?)

- Momentum (is it a business on the move?)

When talking about Momentum, things like Manganese prices, China activity etc all have an impact as to whether the stock is on the move.

If I was looking at this just from a Quality perspective I would say something like, "Sure the price is down, but assuming the world needs Manganese, I want to find the best Manganese producer I can."

I know it is subtle, but the Ranks each look for different things. The macro 'should' be caught up in Momentum because price captures opinion and earnings momentum (aka analyst revisions) will captured a learned opinion.

Value captures some of the macro as price is obviously a factor in determining value. If the macro suggests a bit of fear, the price will fall, which makes the Value go up!

Quality doesn't capture as much of the Macro as it is a business assessment. Is it Quality, Healthy, Generating a good Return of Capital, Cashflow etc

In short if you are an investor that is cognizant of the macro, then an element of Momentum should be included. Just like me, I am a Quality Investor who also applies Momentum. That is why I look at the QM score a lot in the Screener and here https://www.stockopedia.com/sc... But then I also overlay some basic charting to further help me.

(Thank heavens) Not everyone needs to be like me. Ed for example is a VM (Value / Momentum) investor. The question you should ask yourself is what type of investor are you? Long-term, short-term, active, passive, dividends, care about macro, risk taker, risk averse etc.

Once you answer these questions then a strategy can be built around this and that is where Stockopedia can help you immeasurably by helping you stick to that strategy with discipline.

We look forward to accompanying you on that journey!

Momentum Monday 1st May

Broader Market Sentiment

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Elio D'Amato

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