We are top-down investors. We start with the macro-economy, move to sectors and industries, and then look at stocks.
We rely totally on relative strength to give a recommended weighting of each sector. We examine the relative strength of the 500 stocks in the S&P 500, along with those in the S&P 400. We analyze which sector(s)'s median stock has enjoyed the best combination of market strength in the last 3, 6, and 12 months. We also give priority to those groups that have the highest percentage of stocks outperforming the S&P 500 in those time spans. This keeps one or two "screamers" in a sector from camouflaging the real internal and overall sector action.
In the last six months, since the peak of the market in April, the very tiny Telecom Sector has done very well. But the sector only includes a total of 13 stocks out of our 900 stock sample size. Utilities have also done well, and my first temptation is to say it is only a defensive move, but the stocks themselves look pretty good. However, our favorite sector still remains the Industrials Sector - a nice lot of very good looking stocks.
We strongly believe in the top-down discipline of portfolio management. Each week we compile the theoretical recommended sector allocation, and as we manage our portfolios, we use the allocation as a guide to where we should search for new stocks. With the ebbs and flows of the market and relative strength, our actual sector weighting varies from the theoretical recommendations, but these recommendations keep us headed in the right direction, focusing on emerging sectors and de-emphasizing lagging sectors.
To continue reading and view the recommended weightings, click here.
Please see important disclosures at the bottom of this page.