Momentum Wednesday (in Lieu Of Monday) 28 December 2022

27th Dec '22 by Elio D'Amato

8 comments 517 reads

Welcome to this shortened trading week and to Momentum Wednesday (in lieu on Monday). Markets will also be closed next Monday as well so we too will alter the timing of this report to suit.

And just to start us on a positive footing, we at Stockopedia hope that you will all have a prosperous New Year, both in wealth and good health!!!

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Anecdotally it is tough to generate any clear direction at this time of year... however it can definitely play a role in maintaining the continuation of a trend.

Therefore before we commence this week’s analysis, we caution reading too much into any signals provided at this time.

But of course, investors still need to respect the broader narrative and trade accordingly. (Otherwise why bother writing this week’s edition?)

S&P500

The S&P500 had its third negative week in a row. Further entrenching it within the down channel that has formed from the peak a little under 12 months ago now.

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S&P500 Weekly Chart

2022 will likely be recorded as a down year for the S&P500, its first since 2018. The good news, barring disaster, is that it won’t be as bad as 2008 (GFC related) which was our third worst annual performance for the S&P500 on record.

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S&P500 Performance since 1928 Source: MacroTrends.net

Bringing it back to the present day, Despite the downward move, we are still above the range of 3700 - 3740 meaning there is hope. We flirted with the top of the range on Friday which you can see on the chart. But for now we are holding.

Even lasts night’s fall (27/12) of 15.58 points to 3829.24 was not enough to break the line yet.

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As a reminder, a break below this range will likely see a test of the downward part of the channel of between 3300-3400.

The lead up to the New Years trading Holiday in the US will likely be more keenly watched than usual, given where the index sits.

S&P/ASX200

Likewise, we too experienced our third consecutive down week for the S&P/ASX200

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S&P/ASX200…

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But we don't do tips…

Now, before we publish some Naps, we need to make some disclaimers. As most readers will know, the entire philosophy behind Stockopedia.com is not to 'tip' stocks. Why don't we tip? Firstly and most simply - we don't believe we need to. The history of stock market returns shows that simple rule-based stock picking models have been far more consistent and effective than human forecasts.

The history of human forecasting is riddled with failure. Left to our own biases, we tend to project what's just happened, so our forecasts often lag reality rather than predict the future. Those that want to read up on the appalling accuracy of human forecasting should read Sin 1 (the folly of forecasting) in James Montier's excellent Seven Sins of Fund Management.

In contrast, for the last 80 years or so since Ben Graham began his work on classic bargain investing strategies, simple checklist based approaches have been shown to be far more consistent at beating the market. Put simply, statistics trump stories in stock market strategies, and that's where we put our bets at Stockopedia.

More importantly, we believe everyone is capable of making their own investing decisions. Rather than mirroring the 'broadcast' approach that most financial publications take, our philosophy is to put the best possible tools at your disposal and provide the education to use them wisely so that you can select your own stocks.

A method for our New Year Naps

So it's within this framework that we thought we'd try out an angle to create our own set of New Year Naps - not as a set of 'tips' - but as the outcome of a checklist of rules as follows:

Rule 1. High StockRank - Order the UK stock market by descending StockRank

Where better to start than by leaning heavily on our StockRanks. The StockRanks are designed to find good, cheap, moving shares - known as quality, value, momentum stocks to the geeks. Value and Momentum are powerful drivers of stock returns and they've worked as strategies for the last hundred years - while past performance isn't a predictor of future returns history does tend to rhyme.

We've researched the StockRank in detail and believe it's a robust methodology. Portfolios selected with the ranks have performed well in backtests and in 'the wild' - strongly outperforming the FTSE All Share since launch in 2013. There's no reason why good, cheap, improving shares should not continue to outperform their opposite - expensive, deteriorating junk - so it's the basis for generating our Naps list.

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Rule 2: Not hard to trade - Remove all stocks which are highly illiquid

We've removed hard to trade stocks from the list as they can be risky, most investors don't want to own them and they can be expensive to trade. So no stocks with less than a £20m Market Capitalisation and no stocks with a bid-ask spread > 5%.

Rule 3: Diversify - Select the single highest ranked stock from each sector

The very top 10 stocks by StockRank include 4 Consumer Cyclicals, 4 Industrials, 1 Financial and 1 Basic Materials stock. Only 4 sectors are represented out of 10 possible. Building a portfolio with such heavy weighting in single sectors can be highly risky - what if the economy tanks when you are loaded with cyclicals? There are 6 other Economic Sectors - Energy, Telecoms, Technology, Healthcare, Utilities and Consumer Defensives - and we thought it more interesting and prudent to cover the highest ranking share from each with an honourable mention for the second best ranked."

InvestTrader

29th Dec '22

Hi Elio,

Nice article, thanks.

Can you do some stuff on an Aussie NAPS ? Maybe good time of the year to start a portfolio for the community to follow.

Thanks

Gary

Elio D'Amato

Hi InvestTrader,

Yes we will be replicating the concept of the NAPS portfolio here in Australia. A quant driven NAPs portfolio would be a good exercise for all as an education piece. I have found this old article written by Ed himself which you can read here. It is a great explainer (and thoroughly entertaining) of the NAPS concept and how it can be applied. In won't be too much of an intellectual leap to see how it will be applied in a OzNAPS setting. Thanks for the suggestion.

jabconsl

Disappointing- My Aussie subscription won't allow me access to Ed's NAPS article, which seems a bit odd as usually the articles are accessible? Can this please be reviewed. System wanted me to add a UK subscription ?

AND.... why have YAL, WHC et.al. fallen.

Yes - you need a UK sub to view the NAPS stuff. I have complained about this previously

Great - look forward to it.

No specific reason other than what I responded to under the TER article recently. Often after such a long and strong run, these are the stocks that will fall heaviest when markets get nervous as investors lock in profits.

30th Dec '22

If you have trouble accessing the old article... I have tried to fit much of it here. All data and commentary on markets is out of date and I have attached this article purely for education purposes only

By Ed Croft 2015.

"When I first started subscribing to stock market tip sheets in the 1990's, the concept of “New Year Naps" popped onto my radar. Many tip sheets would choose a handful of favoured stocks (naps) for the year in a special section of their January edition. I thought the phrase and practice was an odd idiosyncrasy until I started to spot racing tipsters and bookies refer to naps when considering racing certainties.

It seems that the origin of the phrase 'a nap hand' comes from the traditional English card game called “Napoleon". In the game each player is dealt five cards and declares how many tricks they think they can make. A “Nap Hand" is a declaration that you can take all 5 tricks - so it's only ever used when you've got very strong odds. I've never played or heard of the game Napoleon but apparently it used to be quite popular. The phrase 'nap hand' seems to have been adopted first into horse racing and from there eventually into the tip sheet tradition.

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Momentum Wednesday (in lieu of Monday) 28 December 2022

S&P500

S&P/ASX200

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