Summary
- Investing Group leader, JD Henning, shares his momentum strategy in this exciting webinar.
- Collectively, these models have seen tremendous success, producing annualized returns of as much as 68.23% since 2017.
- Watch this webinar now!
Check Out Value and Momentum Breakouts Now!
The transcript found below is for readers who would like to follow along. Please note that the transcription may not be 100% accurate.
Daniel Snyder: Hey, everyone, I’m Daniel Snyder from Seeking Alpha. Thank you so much for joining us today for this engaging webinar with the one, the only doctor in the house, JD Henning.
Before we get into this engaging conversation going over his stock picks that he has opened, that he’s going to share with you all the models and his great methodology of how he approaches the markets and outperforms annualized returns. I want to go ahead and get our housekeeping out of the way. So, bear with me real fast. We’re going to go through the legal disclaimer.
Past performance is no guarantee of future results. Information provided by the Investing Group does not constitute investing advice. Any views or opinions expressed in the webinar do not reflect those of Seeking Alpha as a whole. Investing Group leaders are third-party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Seeking Alpha does not take account of your objectives or financial situation and does not offer any personalized investment advice. Seeking Alpha is not a licensed securities dealer, broker or U.S. investment advisor or investment bank. And now that that’s out of the way, we can jump into the conversation that you come here today to see.
JD Henning, thank you so much for taking the time today. How are you doing today, by the way?
JD Henning: Good, Daniel. Thank you so much for having me on.
DS: Awesome. So, let’s dive right in. We got to know what’s the background of JD? How did you get into finance, the investing approach, can you lay it out for us?
JH: Okay. Well, real briefly, I started investing when I was about 19 years old and I was dabbling in stocks and options. And I just started exploring different ways and different models that are out there to try and beat the markets. And years have gone by, I’ve started my own businesses and sold them.
And recently I sold a wind energy business and decided, it’s a good time to get back into education and do some research. And I went for my doctoral degree in 2013. And I spent all my time just kind of looking at what are the best models? What are the best variables? Is it possible to beat the market? Can you time the market? A lot of those kind of questions. And that brought me to Seeking Alpha to do a lot of tests.
And I’ve been running research on the market, on Seeking Alpha now for going on seven years. And it’s kind of a funny story because I was just running my research models for testing. And Tim and Jonathan kept reaching out to me on email saying, wouldn’t you like to start a marketplace service? And I thought, “Well, what are you talking about? I’m just running research models.”
And the next thing I know, I’ve got a service up and running and I’ve just been putting stocks and models out there along with my research for the past seven years. So, I’m looking forward to sharing what I’m doing and I hope it’ll benefit people for the long-term.
DS: Well, I think it will. And that’s why we asked you to come and join us today because these models, the cool thing about it is, as we’ve talked about before this webinar, is there’s a little bit of something for everybody, right, whether it’s ETFs or stocks, I mean, your models kind of cover the gamut and you break it down by sectors and market conditions and everything else. So, that’s why I’m excited to have you here today.
Now, I know you put together a presentation to share with us today. So, why don’t we go ahead and dive right in. You can share how the models work, how you analyze the models, and kind of what goes into all of your stock picking service that you provide on Seeking Alpha.
JH: All right. Thank you, Daniel. Let’s take a look at that. I’ll share my screen here. Share that. Okay. Can you see the opening slide there?
DS: Yes, we can.
JH: All right. I thought I would just go with the same theme that you used with Zach a few weeks ago about trading smarter together. I think that’s really our goal on Seeking Alpha is come up with advantages to doing better in investing in the market.
So, how do you trade smarter? And I put it into five categories. One is you can aggregate your knowledge, and I think that’s what Seeking Alpha does really well. We have all these contributors like myself that are putting ratings out there for the stocks. And that’s beating Wall Street analysts, according to Zach’s presentation and the analysis I saw from Seeking Alpha. So, there’s tremendous data available out there that you can do your own analysis.
The other thing is you can discover an effective model and that’s part of what I’m going to show you today. I ran an inductive study on the market variables just to find out what are good variables to work with? And, of course, there are many methods that work well in the market. There are many contributors to Seeking Alpha that have great ideas and great systems.
I wanted to leverage what I thought were some of the best variables in that market in that condition. And then once you have an effective model, I think, of course you want to apply it to the stocks. And I’m going to give you examples of my MDA process on how I use it for stocks. And then you want to apply it to funds if you’re into ETFs and ETNs.
And then lastly, if it really works, you can use it to time the markets and other investments. So, I found that what I created was the momentum gauges and they do give you some advantage to timing, and I’ll get into that a little bit here.
So, starting off with effective models, I really believe what George Box said that, “All models are wrong, but some are useful.” And I don’t think that anybody can predict the markets. I don’t think you can come up with a perfect example or perfect forecast of the markets, but you can find effective models and they can give you advantages.
So, I’m going to just show you these two. Basically, you have the Seeking Alpha Analyst Ratings and that’s an effective model. It draws from a lot of different contributors. It scores the stocks and it gives you advantages.
In my own research, and I’m going to give you the two-minute version that, from years of research and study that I was working on, but I basically thought, why don’t I just come up with a process, like I said, an inductive statistical model that will tell me what variables are the best?
And I said, I’m going to draw from fundamental, technical, behavioral, analyst ratings, anomalies, wherever I can find the information. And I looked at all these different theories that are out there in the financial research world, a lot of good published articles and journals.
And I said, “Okay, what if I organize those into three test variable sets: behavioral variables, fundamental, and technical. ” And then if I sort them into a cycle, and I’ll get into that a little bit more in the next slide, but from positive acceleration to negative acceleration, I wanted to find stocks that were breaking out and then I wanted to find stocks that were at risk of breaking down. And I wanted to be able to organize stocks based on these criteria on these variables.
The one thing I didn’t want to do was, I didn’t want to use price change as a variable to forecast price change. I know there’s a lot of processes out there, a lot of oscillators and models that use only price change to try and guess what the market’s going to do on the next price change. And that goes with moving averages. It goes with a lot of different things. So, I try to steer away from that as a variable as I was trying to solve for price change.
So, I wanted to answer the question, which variables are the most significant, which conditions differ across each of these momentum cycles, and what variables would even work in sectors, if I started analyzing sectors? And are any of these predictable for the market? Can you work with this for predictions?
And so, I’ll just show you one more kind of wonky slide. This is what my research is built on is a multiple discriminant analysis process. And what it does is, it funnels a lot of variables into a statistical analysis. What jumped out at me as I was doing a research was that 88% of financial studies test fewer than three variables and many test only one.
And what I thought was, why try and pick the variable and see if that works when I can just tell the machine in a sense an AI approach, which one and which one of these variables in combination, or which group of variables are the strongest? So, this is an inductive process. I didn’t have the answer when I started, and I just wanted to figure out which variables were good to use. And this approach is different than just chasing momentum.
So, I feel like my model is across the board, looking at all different approaches from behavioral to technical to fundamental to see which ones were standouts. And we can compare this to the Seeking Alpha Analysts’ Ratingss, because at Seeking Alpha, you’re looking at over 200 contributors that are scoring different stocks. And that increases the confidence that you’ve got a good pick and these analysts really like it.
The downside is that you might have some overlap, and you might have a lot of fundamental analysts and not a lot of technical analysts. It gets overweighted in one model than another. So, it can be an advantage and a disadvantage.
If I were to use the MDA process on Seeking Alpha analysts, the idea would be let’s find the five different analyst approaches in combination that would give us the most reliable ratings on stocks. And so, we’d probably want something from technical, something from fundamental, something from value, and we put those analysts together and see how they track over time. And that’s more or less what the MDA process does.
I just used a lot of variables. Originally, I start off with 24 variables and then I increase it to over 75. And at the bottom here, I have an example of what I was trying to accomplish. I was basically trying to put stocks into different categories.
What are the – what do stocks look like that are in segment six breakout conditions? Do they stand out? Is there – are there a different set of variables that show that these stocks are going to break out? And conversely, are there stocks that look like they’re going to break down? What variables stand out to that?
And so, just a real quick snapshot of one of the steps in the statistical process is just organizing variables across these different seven functions to see how the stocks sort based on the different characteristics of the stock. And you can see by the colors here that they were pretty well separated by these variables.
So that means the model was being – was explaining a lot of the variants and it’s a powerful model. And so, it leads into finding better information for stocks. And so far I’ve done 338 weeks of public selections, only on Seeking Alpha as part of my live forward-testing research]. And all of these tests are in good and bad markets. I don’t stop when it’s going down. I want to see how the model works in bad markets, too.
And what we have here is the chart of the last five weeks with the MDA breakout returns. And you can see in the green that those are the weekly highs. These are portfolios of four stocks that are picked every week for members on Fridays and measured till Friday. And you can see the weekly closes in yellow and then the S&P line in black.
And what it basically emphasizes is that these are good stocks, but that’s not all the story there is to tell. You have to have a good sector and a good market. There’s a lot of times investors are in great stocks, but they’re in bad conditions. And I like to show the sailboat picture that they get stuck in the mud. It may be a great boat, but if the sector and the market liquidity is not aligned, you could be in a great stock and not go anywhere.
And so, all of these things in combination help produce some of the best results. And what I’ll show you now, well, first, I want to highlight the current picks that we have that are open right now. And then I’m going to get into some detail from the Momentum Gauge website on how the model works. And those are some images of the stock charts, but we’ll go into it in more detail here.
Let me move this out of the way real quick.
DS: Yeah, JD, while you’re switching over to your site real quick, just to jump in with the question here is, so you have these models that you’ve put together and you mentioned that it’s a weekly kind of run frame. So, you said, Friday to Friday, is it kind of a buy at market open, sell at Friday close, or how does that methodology work?
JH: Yeah. So, when I first came to Seeking Alpha, I wanted to have intervals where I could test how this model worked. And I thought, “Well, I could test it for the whole year and see how it goes. I could test it for a couple of days and just do samples.”
When I first launched it, I was doing like 20 stocks a week. And members have since said, “No, just give us 4. It’s too much to track 20 of them.” But the idea was I needed a good sample size to see that it worked. You fast forward seven years, and I finally, I’m arriving at where I’ve been trying to get for a long time and I want to send a big thank you to my development partner, Lance, who built these – this website and these charts.
He took my statistical research and put it into a user-friendly model, where you can just look for the green and the red and the breakouts and make it a lot easier. But the simple answer to your question is, they go out weekly, but ideally, you follow the conditions of the signal.
So, if it’s positive, you stay with it for as long as it’s positive. And if it starts turning negative, that’s a good indicator to get out. And what I’ll show you is our pick here, CLSK, from last week. It was moving into strong positive conditions right there. Can you see that all right, Daniel?
DS: Yeah, you’re showing the green bars at the bottom of the screen.
JH: Yeah, yeah. So, at about, it was 404, the share price is when it first turned green and I picked it up for the weekly selection and it’s still going strong. It’s up – well, it’s up 53% for the week that I measured, but it’s still in the green condition up over 94% through today as we’re talking.
And what it just shows you is the strength of the signal, and it shows you how well it’s moving. And just to refresh the momentum cycle, I explain it here on the website. These are positive six breakout conditions on the momentum cycle that I’m focused on.
And it’s a combination of all those different variables. And then these are segment two breakdown segments that we want to avoid. And in between are kind of the parts of the momentum cycle that aren’t as strong. And I just kind of group them together in yellow to keep the signal simple. But that’s what that does in a nutshell.
The other stock I want to highlight is Royal Caribbean, and this has a really cool chart. This is in our premium portfolio. But I just want to show you how it turns red, then green, then red again, and it shows you the strength of the signal.
So, as it’s dropping off here through the day, it’s not qualifying for segment six as frequently during the day. And that can be a warning sign. So, if you sell out here, it’s – and it turned yellow right there. And then you could avoid a big downturn and then it picked back up again.
And the other thing you can do with these charts, they expand and they contract. So, you get closeups and you can see exactly here was the breakout signal right there to buy and then it took off. But a cool feature too is, we have a lot of history here that we’ve accumulated. And if you – you can go to year-to-date one-year, and you scroll back and you can see it was way up here back in early 2022 and then it just fell off. And if you got on the red signal right there, you would avoid a major downturn.
And this gets to one of the questions I get asked a lot, how long should I hold it? And I use proxy technical indicators to help people avoid downturns, but this is the culmination of all those variables. And this really helps put it in clearer perspective of when’s a good time to get out. And it also makes it hard to be a buy and hold investor.
I know a lot of people just say, “Give me a good stock and I’ll just hold it for a year and see how it goes.” But if you’re in Royal Caribbean, which is a good stock, you’ve got all these dips that are happening. And you start to see that timing matters. And so, if you have this information in front of you, you can avoid some of these dips. You can trade. You can add up your position. You can increase your position. I mean, it’s a strong signal, so you can ride it longer. Those are just some of the advantages of this model.
And then another stock I’ll show you is, Valero. That was an early breakout stock today on the S&P 500 gauges. And I’ll get into that in a little more detail from the website, but you can see that the model is just giving us little green shoots, kind of like back here, just starting to come out of the red and it’s been in the red for a long time.
So, it might be a good large-cap stock for investors out there if they want to buy and hold. And then just stay in that for as long as the signal is green. That means that the fundamental, the behavioral, the sentiment, all those different variables are still quite positive.
And then the last pick I’ll show is a very different kind of stock. And this one is a high-risk, high-return potential stock that is a pick for my members. This is a live chart of the stock and it’s called GigaCloud Technology. It just came out with earnings on Friday that really beat.
And I’ll just give a quick overview. Analysts have a consensus target at $16.60. But what’s really interesting if we get into the fundamentals down here real quickly, it has really good valuations. So, this hits the buttons for the value investor. It has really good earnings numbers that just beat like crazy. It has tremendous potential for growth. You can see the earnings per share now, the $1.78.
And you can see the annual earnings here. It has a very high insider ownership, which means they’re fairly unlikely to sell, but typically they do like to go private when they’re very successful. So, that’s something to watch.
And then the other thing that stands out is it has a very high short float. And so, this stock is at great risk of getting squeezed higher. If there’s 40% of the holders of the float are betting the price is going to go down. And then you can also see that the shares outstanding are going down, that it’s down to 26 million shares.
So, the company is buying back shares. They have a very high insider ownership. I really think this one could be a fun ride to at least as high as the last earnings move, potentially higher. But again, it’s a high-risk stock with a lot of volatility. And I just wanted to highlight that one real quick.
So, if we go back here, let me – so those are the four picks that I’ll just share with you right now and members of my community are already in most of these stocks. And we’ve been discussing them for a while.
CleanSpark, they’re still holding from last week. But I always say, take profits to a level that makes you comfortable. Just let your – the rest of your shares run for bonus gains while the signals are positive and they’re still positive.
So, the next thing we’ll look at is the MDA breakouts. And these are the picks – this is the reason I came to Seeking Alpha in the first place, is I just wanted to test these out in a live setting, and then I have all the data recorded in the members area for review.
But what I’m showing here is two different things. You have the MDA breakout picks for 2023, and you can see their max weekly gains and their minimum weekly returns. And this is for every week, good or bad, with an average of about 4.45%. Last year, it was a really bad market. It was down, it was 2.8% returns. Again, this is MDA picks with no market signals.
Over on the right-hand side, I have the exact same picks, but I’ve isolated them to positive market momentum weeks. So, if you only traded in 26 positive weeks, the average goes up to 6.5%. So, this is just more confirmation for me that timing matters, that positive momentum conditions or positive MDA conditions, they matter. It tells us that inflows are coming in and you want to be in stocks when there’s large dollar inflows coming to the market. And I know a lot of traders, a lot of members of our great community, they recognize these charts from a – from the standpoint of the market.
In January, we had a big rally. In February, it started to fall off. June and July, it rallied again, and then we hit lows down in October. And then here we are entering the fourth quarter with really strong results, and a lot of that has to do with market momentum.
So, what I wanted to highlight here was stock characteristics matter, good market conditions matter. And then the last thing I want to look at is, is the sector conditions. And what I’m highlighting here is, I have sector gauges on my Momentum Gauge website. And I use the sector gauges and the market gauges to do ETF trading. And I have ETF portfolios.
One is a Momentum Gauge portfolio that just trades bull and bear funds based on positive and negative signals. And the one that I’m showing on the screen is the active ETN – ETF ETN portfolio. And that’s what I actively trade for members with buy and sell alerts in the Seeking Alpha chat rooms.
And these were our holdings as of December 1st. These are the returns on the signals. Many of those funds we still hold. And I like LABU and the biotech sector a lot. It’s in a very strong breakout. And I’ll show you in a little more detail, this is the financial momentum gauges. We’ll zero in on that one and cut over to that.
So, this is the Momentum Gauge website. And on this side, I have market gauges for the last six months. And on that side, it’s the S&P 500 Gauges. And when it’s in the red, those are negative market conditions. And when it’s in the green, it’s positive. And you can see that we’re getting back up to levels of high positive that we last saw in July. And that can be a good time to take profits and be a little bit more strategic in your investing. These are – in between, we have all the sector gauges and the energy sector has stayed negative for the last few weeks, while the other sectors are doing a lot better.
And then I have it, you can see I’m having a free webinar today. You should watch us. And I have the Market Momentum Gauges, the S&P Gauges, these are the picks that come out twice a day. These are the sectors. These are sector gauges, how they’re balancing and how negative they are. And what I want to highlight is the financial one and we’ll just click on the daily financial gauges.
And you can see that they’re highly positive. It’s benchmarked on the FAS fund, which is a 3X financial bull fund. And you can see these signals, very positive. But if we go back here to earlier in the year, which is the same picture I have on my slide, you can see that we had a major financial crisis from February, basically through May, and we got a negative signal here on February 21st. And that’s the time when Silicon Valley Bank and other banks were starting to have serious problems.
We had the most bank collapses that we’ve had since 2008. And two weeks later from the signal back here – over here in March, you could see that the FAS fund really broke down the financial sector just completely dropped and that was a gain with bear funds of over 40%. And then it stayed negative all the way through May, and it’s starting to pick up again. And you can look at this on a daily basis, or a weekly basis, or a monthly basis.
Here it is on a weekly basis for the year. We’ll just say, yeah, it’s on one-year or year-to-date, but you can see exactly what I’m talking about. In February, we got a negative signal and it just fell off the cliff. And other sectors were doing fine. The technology sector was doing extremely well.
So, this is where having a good sector condition plays an important role in picking your stocks and then it turned negative. And now we’re in another very positive condition for banks and financial stocks.
So, that – and I can show you. Again, back to the overview. You can see the positive acceleration in segment six, the negative acceleration in two. Some people like to short stocks. These are stocks that are good for shorting.
On the right-hand side, these are good ones for breakouts. And I go through all the different sectors, the sector gauges, and charts, and so forth. This is also – this also comes out to you with a notification on SMS and email. So, if your gauge signal turns negative, you get a text alert or whatever. So, let’s go back to the overview here.
DS: JD, real quick, you said these models, they update how many times throughout the day?
JH: Twice a day. It runs new stocks twice a day, it updates every 15 minutes, checking all the different characteristics. So, when you see a chart that has a small green bar versus a big green bar, it hasn’t gone through as many checks through the day as a full day of trading and that’s something to consider. That’s how it determines market strength or market signal strength.
Okay. So, we have the sector gauges that help us to identify good sectors. We know to look for good stocks and then we want to have good market conditions. We don’t want to trade like in the COVID correction. This is a picture of the COVID chart back in 2020. This was the biggest first quarter decline in U.S. history.
And I was looking for a way to test the gauges and I didn’t expect to have such a major drawdown to use it. But you can see, we got a really good signal here on February 19th and then it bottomed when the Fed intervened on March 23rd.
And then, well, you know what? Let’s just go right to the – let’s go back to the gauges themselves, so you can see. We’re going to go right here to the daily. This is the Market Momentum Gauge. And we’re going to scroll back to 2020, which pretty much stands out right there. And you can see how it just fell off a cliff, and members of the service had a really good signal. And we loaded up on bear funds and did very well. That’s an unusual event, but it was good to ride the signal on the – with the right trade.
But what I want to highlight here is the positive values, the green line, that went down to zero. There weren’t any stocks at that time that were in MDA segment six in breakout conditions. And at the same time, we were getting some of the highest negative values that I’ve ever recorded, and you can see how that took off.
Now, you could use the negative signal here as an early entry point. And you can say, “Oh, look, it’s coming down from a massive peak. So I’ll buy in over here. Or you could buy in really here at the lows as the positive gauges increased.” My signal has a default setting of when the red and the green cross over, and there’s more positive than negative. And so that occurred over here in April just as a safety valve, but more aggressive traders could easily have entered sooner and bought in.
So that was a market condition signal that helped us greatly. You can see we had a very strong run from quantitative easing with the Fed intervening and we just got stimulus and everybody was picking winners and that just went on and on and on and on with a lot of stimulus. So very long positive signal back there, lot of chop and now we’re basically over here with a breakout. And this is the breakout from like November. And it’s been serving us very well for probably for Q4 rally. So that’s something else to watch.
Now, if you switch this over to — let’s go — well, we go back to weekly, and it just cleans up some of the noise, and you can just see from a higher level what the market’s been doing and how timing matters. Here’s a chart showing from the October or the July/August highs down to the October lows of last year. And we’re having very similar pattern this year with highs in July and August, and then we had this sell-off down to the lows and now we’re getting another rally. And in between we had the January rally of last year, or earlier this year. And we could see another rally like that for 2024.
But in between, if you really get into the details, you have these little peaks, and I think that’s what we’re going to get into next, is we’re getting this rally and then people are going to take some profits. And I think we can have a drawdown as big as this one or just a small dip before people load up again to start the new year. And it would just continue this pattern up and down, up and down. And that’s money flows, that’s fundamentals, that’s a lot of different variables that are being processed to give you these charts.
And so I would just encourage investors to watch this and see if it starts to dip. If we get a negative signal, we could be in for a little dip and then a big rally. So that’s how I use it for the market level. You can use this for the sector level, the – just for the S&P 500, individual stocks, all kinds of things.
So here’s VLO on the breakout. That’s one of the ones I’ve highlighted earlier. And these new picks come up every day, two times a day that you can trade into. So…
DS: So, JD, with the Market Momentum Gauges there, I mean, I imagine…
JH: Yeah…
DS: …as you mentioned at the beginning of the webinar, it’s all about trading together and really building each other up as community within your service. I imagine you’re sharing all this information there.
JH: Yeah.
DS: But from a market momentum specifically, because there are so many different types of investors, and we’ve talked a little bit about how you shared the four stock picks, but then also you cover ETFs, and I’m sure there’s something for dividends and active ETFs, you cover a lot of different segments here. But when you say Market Momentum Gauges, right, like I think about the people that love tech, but might not like the Russell 2000. Like — or is that all encompassing for you there? Like, how does that break down?
JH: Well, it depends. Some people just want to know how the SPY, the S&P 500 fund is doing, and that’s a high level market question. And so for those folks, I would point them more towards the S&P 500 gauges. And what that’s doing is taking the MDA approach to just those 500 stocks, and it’s giving signals on those stocks. And those are different signals than the stocks across 7,500 stocks on the U.S. market.
So you could dial down into those stocks differently. And then if you’re only interested in technology, then you come over here to the technology sector gauges, or the financial sector gauges, and you figure out what funds are the best representation for that buy and sell trade.
Like I showed you with the financials, I use the FAS and the FAZ 3X leverage financial funds. Each of these funds is put out by a different company and it may not represent all the funds in that sector. Energy sector is a great example. There’s so many different types of energy funds. You have energy equity funds. You have funds like ERX that are just the energy sector. You have NRGU. I like that a lot, but that just looks at the 10 largest oil stocks by market cap. It doesn’t give you hundreds of other stocks that are in there.
So there’s a caution to that. And I think maybe you’re alluding to that. How do you trade with all this information? The caution is you want to look at that individual sector and say, “How does this fund that I’m looking at relate to the entire sector?” And these sector gauges look at all the stocks in the sector. And if you’re trading NRGU, which is a 3X bull fund on the biggest energy stocks, XOM, CVX, COP, a lot of those symbols, SLB, you might – it’ll treat them as equally weighted versus how big of a mega cap they are.
So I would say, “Look at the mega caps that are in that fund versus applying the broad energy spectrum to those 10 stocks.” The other side of it is, all of my momentum gauges are equity-based. They’re not commodity based.
So the futures market may, there’s days where we see the oil prices going through the roof, but people are selling energy stocks. So the MDA process is only evaluating the equity side of it. And it’s not looking at spot price on gold or hot bellies, or corn, or orange juice, but just processing the stocks that are there and looking at those variables.
So there’s a lot to take in. I have this all written up in the Seeking Alpha investment group. I’ve got a lot of resources there, a lot of history of testing the models. A lot of people ask me, well, what about back testing it? Can you go further back than 2017? And I can, but it’s really complicated because all of these stocks have to be in relation to each other on that day in 2017. And then I’d have to sort them each day going backwards to 2016 to 2015. It’s a complicated endeavor.
And the other thing is I don’t like to move outside of actuals. All my testing is live forward testing. I don’t go into extrapolations. I don’t get into stuff that I – if I didn’t create those results, then they don’t get included. If I – they’re not in the measurement period, they don’t count.
So that’s kind of an overview of this website and in a way, it’s a culmination of years and years of research and I’m still fine tuning it. Everything is a work in process. And again, this is just the MDA process being applied to stocks and funds, sectors, indices. I may expand it to the NASDAQ and other indices. I have some great members in our community that are from overseas, and they asked me to look at the DAX or something else and can you do the gauges on foreign indices? Absolutely, but I’d have to run the models on those stocks in those indices. And so that gives you some idea of how the process works.
DS: That’s a lot of data, if I do say so. Just real quick though, so you have this MDA process that you just kind of walked us through and you’re taking stock picks and you’re presenting it to the subscribers of your subscription service. Are you putting those into portfolios that you present to them? And if so, how are those doing?
JH: Yeah, I’d love to show you. Let’s take a look, Daniel. The next part of trading smarter together is to put these into different kinds of portfolios. And these are ones that I’ve put together over the years. As I mentioned, I’ve been doing seven years of MDA breakout testing, but as I got more out of the research side, I thought, how would I build a service for people that I would want to be a part of myself?
And I thought, well, I need to get a wide range of portfolios that I found in the literature. Again, I’m building off of other people’s research and enhancing it with my models. But these are some that I’ve found over the years. One is a Piotroski-Graham value model from Benjamin Graham and Joseph Piotroski. And I put their two different models together and then I enhanced it and it’s done remarkably well. It hasn’t been negative since I started tracking it.
And if you use, again, these returns are not including the momentum market signals. But if you add the market signals to avoid downturns, I do believe you could greatly improve these annualized returns.
On the left, I have the compounded annual returns and you can see how they stack up. The black dotted line is the S&P 500 through December 1st. And then I got interested in some of these forensic positive and forensic negative models. And that goes back to my certified fraud days and anti-money laundering.
And I saw that if you can have red flags on different stocks, it doesn’t mean that they’re doing anything bad, but there’s just some anomaly going on there that you would want to have auditors come in and look at it a little bit more closely.
And I thought why not highlight those portfolios with some enhancements. And I just call them forensic positive, forensic negative, using some of the top algorithms that have been published in the research. And you can see that they kind of work inverse to each other. The forensic negative was extremely positive when we were getting a lot of quantitative easing in the markets and we had a 94% return there.
And then as stimulus has gone down, people have started looking more towards value and they’re less chasing exuberance and these more negative stocks. Some of them fall into the category that I write about called zombie stocks. That’s a name that the Federal Reserve gave to certain stocks.
But usually, when there’s a high risk appetite, people go for these negative forensic stocks and they can get some really good returns. The forensic positive just means everything looks really good on their balance sheets, their financial statements, the growth looks good. And I detail all these models in much more detail in my Seeking Alpha service. And I have an active portfolio here. I call it the premium mid-cap. I try and stay out of the 10 largest stocks in the market, which was a disadvantage this year, but it was a big advantage last year. And then I have the growth and dividend mega caps.
So these are steady growers with high dividends, at least, 2% annualized dividends. Some of them are around 4% to 5%. And you can see that this is their growth rate. And then I have an active ETF portfolio, I showed you some of that. And then I have a bull/bear combo using the Momentum Gauges going – switching back and forth. And this is the S&P returns through December 1st.
So that’s the additional offerings that I give for long-term portfolios, short-term, and so forth. And to give you a full overview of all that, I have this. This is from the dashboard spreadsheet for the members of Value & Momentum Breakouts. And it ranges from short-term picks. We talked about the weekly MDA stocks, and then it goes to the active portfolios, the active stock and ETF, to the Momentum Gauge ETF models. And then I have a lot of long-term portfolios.
And those, we don’t talk about a whole lot. Most people are in a buy and hold position. Our chat rooms are very active. And people are talking mostly about the short-term weekly breakout picks. And what I wanted to accomplish is to give a spectrum of portfolios that people can build their own optimal portfolio mix. And I have a little diagram here from Investopedia just showing low risk, low return goes from money markets on the portfolio horizon up to small caps with high risk, high return.
And you can – every investor has their own different preferences. As I tell members of my service, I trade very differently today than I did when I was 19. You move up and down this curve over time. And that also helps to answer one of the questions I get a lot, which is the best stock I should buy right now. It’s very common for people. And what I try and explain is, you wouldn’t go into a car dealership and say, give me the best car you can give me right now. What’s the best car you offer?
And it really depends on what you’re after that in this stage of your life. And a lot of investment advisors will walk you through, they’ll sit down and look at your situation, you’ll look at your risk tolerance. I’m just a newsletter format. So I lay it out there for people to choose what’s their best mix.
I try and educate folks that there’s high risk on these MDA breakouts and there’s lower risk as you go into the Piotroski value and long-term stocks. And you put it all together and you can come up with some pretty good optimal returns. And I try and update these semi-annually, monthly, annually, different frequencies to keep new stocks coming in front of new subscribers. And you can see back here, I’m – I have a lot of these long-term portfolios coming out on December 30th for 2024.
So if you only want to start on January and you don’t want to jump in the middle of these portfolio selections, I would say get on board before December 30th and you can see what the new picks will be. And so I mean that that covers what I offer. There’s a lot more resources available in the members library in my subscribers community. And I hope you’ll come in and visit our investment group.
DS: Yeah, like I said earlier, something for everyone, which is the coolest about this, right? Long-term, short-term, if you only want the stock picks of the week. I’m going to go ahead real quickly before I forget. I’m going to drop the link in the chat for everybody that wants to go check out your service. There is that special cost of $74 for the first year running right now.
So you can go, check that out and get those stock picks every single week that we’ve talked about today. And then also, if you want to go check out the advanced service, you can do that as well. Get access to the group chat, have direct conversation with JD and everybody else that is available as well. But I just wanted to drop that. And if you’re watching the replay of this video, it will be linked right below this video if you would like to check it out.
Now, I’ve got to ask you because there’s some questions, obviously in people’s minds, right? When we learn something about new and a new model, questions are natural. So first off, you talked a lot about sector two and sector six, but there’s other sectors. Could you explain that a little bit more?
Like you personally only like to focus on sector six and what kind of like makes up sector six? Is it cash inflows? Is it positive sentiment? Like, is there any kind of information there that you might be able to enlighten us as to why these specific sectors besides just momentum and just a little bit more elaboration, really?
JH: Sure. Again, I put my whole doctoral research information in my service. My community members can review it. I have part of my doctoral defense slides in there. These are just a couple of images taken from it to help explain it.
I didn’t want to get too wonky with – in a webinar here, but basically I was trying to break the momentum cycle into components. And it just happened, there are seven components that I use from negative reversal to negative acceleration. And then I wanted to classify those categories. And then I asked the statistical model, take all these variables and tell me which variables best identify each of these sector components or I should say segments on the momentum cycle.
So naturally, the ones that got everybody’s attention and my own interest as well is which ones are the strongest upward momentum and which ones were the strongest negative signals. And most people aren’t interested in like the center number four, which ones are least likely to move? I mean, there are people who are interested in stocks that don’t move very much. And there are variables that can very well identify those stocks. A lot of it has to do with high dividends, large market cap, things like that that tend to be slow, they slow down the stock’s price movement.
I can’t give away the variables that detail all this or the parameters of those variables, but I use proxies for it. There are different things here. I would say money flow is a really key factor. You want to see if institutional investors are buying. You want to see if the company is buying back their own shares, it can be a terrible stock.
But if the company is buying back billions and billions of dollars of their own share price or their shares, it’s going to send it a lot higher. So there’s times where fundamental doesn’t matter, and there’s other times where fundamental is very important. So this kind of takes in that all-encompassing view of which variables are the strongest and are they in the parameters that matter for the best results?
DS: Yeah. So follow-up question for you then, if — we’re not going to go into all the variables, completely understand that a good chef never shares all of his secrets either. Do each of the different portfolios when it comes to ETFs versus stocks, for instance, or different sectors even, are there different variables that matter within each sector or section of the market?
JH: Definitely. Yeah, when you get into sectors, let me see if we go over here to the sectors. Yeah, financial stocks and very different — they have very different variables from technology stocks, very different from utility stocks. And that gets into a whole another set of different variable tests that I ran. And I hope to get into fine tuning these gauges even further.
But for example, most technology stocks are not high dividend stocks, whereas most utility stocks are. And so you look at those components and the MDA process, it elevated certain variables from utilities as a stronger indicator than it did for technology.
Like technology, dividends weren’t a factor at all in technology. They’re a very big factor in utilities. Similar with real estate, the REITs and the high dividends stocks, they benefit from high dividends and increasing dividends. So those kinds of things contribute to increased money flow and all those kinds of variables are in there.
So I could break this out further and do a section on REITs, a section on utilities, a section on tech, a section on energy, could really get in there. And it’s my hope that people who use the automated website, they’re going to learn more things about the market than I’ve had a chance to study. And I hope they benefit from it greatly in all the trading decisions.
DS: Yeah, I was going to say that’s definitely something that should be reserved for the service in your site and questions for you outside of this webinar because it does sound a little bit complicated. But I think the cool thing that I’ve seen today within your system and your methodology and everything that you have on the service of value momentum breakouts is you have these charts, you have those sector six bars saying, let your winners run, right? Which I know personally, as an investor, when I invest sometimes, I’m like, “Man, I’m up a lot like, does this thing have further to go? Or has it exhausted itself? Or are we going to see a mean reversion or pullback?”
Like, this is the cool thing that you have here that I really got to say, thank you for taking the time and doing the research and your degrees and money laundering, everything else that you’ve done, which I think is really cool, and taking the time to put this together and bringing this to everybody on Seeking Alpha. I can’t thank you enough.
JH: Thank you, Daniels. My pleasure.
DS: And I just want to say one more time, I’m going to drop that link again for the Basic Service, the special promotion for $74 for the first year going on right now. That includes your portfolios. As you mentioned, you have the new portfolios for next year coming out on December 30th.
So that would be included as well, the ETFs, as well as your four stock picks every single week, which as we’ve seen from the results, maybe you can go back to the slide again of how that’s been doing for you, or even as you see right there. Yeah, there you go. So this one right here showing the returns. Now, is this – this isn’t – this is per a week individually, the returns of how they’ve done those green bars? Is that right?
JH: Right. These are not cumulative returns. So you can, I’ll go here. Oops, going the wrong way, sorry. This is the last five weeks. They’re not cumulative returns. I measure them with averages. I think you could even compound them because they’re always separate portfolios every week. But I don’t want to get into putting out ridiculously large numbers and overstating potential returns.
But the idea is that every week is different set of stocks. I don’t duplicate it because I want to try and test new stocks. And I arbitrarily set it to one week, which I encourage people to do conditional monitoring and look at the signals because CLSK from last week, that’s still going strong.
It doesn’t – just because the measurement window is over, it doesn’t mean the stock is done gaining. And so that’s what I try and give as an overview. These are the returns. I have the returns going back to 2018 on the Value & Momentum Breakout website on Seeking Alpha. All my research is on Seeking Alpha. And you can just see over time, we average very high numbers, you enhance that with the market momentum gauges.
And the other thing I didn’t really talk about a lot was you can avoid major downturns. Even if you’re not in aggressive stocks and you just want protection for the downside, that could be the only signal you look for is a negative momentum gauge signal. And then that just tells you, I’m going to get out of the markets. I’m going to play it safe. And I can’t tell you how big a downturn it’s going to be, but I can say things have just tipped negative. This is a good time to cool it, go to cash, go to something safer. And then you come back in when it’s a little bit better. And that can be just the only value you want from the signal.
DS: Yeah, this is just really cool. And also I got to say, I personally like seeing you break it out week by week return and not doing the cumulative, trying to make it a big number. It feels more real. So I got to say, thank you for that.
Now we’re getting up here at the top of the hour. We promise we like to not go over, so we can respect everybody’s time, but everybody thank you so much for joining us today. If you’re watching the replay, we appreciate you taking the time to check this out as well. Really do hope that you go check out JD’s service. There is a lot that he offers here and we hope that you get a lot of benefit from it. And JD, is there anything else you would like to say before we jump off?
JH: That’s it. I just also want to send a big thank you to my great community of investors. They’re very encouraging. It’s a great group of people to trade with every day. I enjoy being there every morning and logging in. So thank you to them as well. And thank you, Daniel.
DS: Yep. All right, everyone. We’ll have a happy holidays. Thank you so much for joining us. Have a great rest of the week and good luck out there in the markets. We’ll see you in the next webinar. Take care.
