Bargain energy bin

October 21, 2015 01:00 PM

The Trendrating Momentum Model is designed to capture medium- to long-term trends lasting a few months to a few years. The model filters out noise using 357 indicators based on price, arriving at eight that work together. A self-adapting algorithm adjusts the time duration of the indicators on the basis of short-term volatility. We provide a rating scale (A,B,C and D) based on the strength of the indicators where “A” signifies a strong bull trend and “D” an established bear trend. A security with six positive indicators receives a “B” rating, indicating the beginning of a bull trend. When all eight indicators are positive, the security is rated “A,” signifying an established bull trend.

From April until the end of August, the Trendrating Smart Momentum Model issued three downgrades to every one upgrade for 211 Energy Sector stocks we cover. This demonstrates how momentum factor analytics are critical for shifting gears before the damage occurs. During the last six months, 75% of stocks in the energy sector were downgraded or “D” by Trendrating. These trends were identified well in advance of the global meltdown in August. Here are some examples of stocks whose performance collapsed steadily over time after being downgraded (see “The bad and the good”).

However, the U.S. Energy Sector got a big momentum boost after a prolonged period of negative ratings generated from our Smart Momentum model. More than 80% of the 211 stocks covered by Trendrating have been rated “C” or “D” during the previous six to nine months. The number of recent upgrades in August might signify that the sector as a whole might be swinging back into positive territory (see “The good”). 

On Sept. 1, our model calculated its monthly self-adjustment to account for short-term volatility. It will be interesting to see how long stocks such as Callon Petroleum (CPE), Memorial Reserve Development Corp. (MRD), Parker Drilling Co. (PKD) and Gulf Island (GIFI) will continue to rebound for the remainder of the year.

About the Author

Rocco Pellegrinelli, Trendrating founder & CEO, began his career as a portfolio manager and investment banker and has since been a proven fintech entrepreneur for the past 20 years. He created Brainpower in 1996 and established it as one of the top portfolio management systems globally. After going public on the Frankfurt Stock Exchange in 2000, Brainpower was acquired by Bloomberg in 2006. @trendrating