Market Update: The Top 3 Sector Portfolio
Boost Your Returns Through Sector Investing
SECTOR AND INDEX ETF PERFORMANCE -
LAST 3 YEARS
Let’s look at how Sector and Index ETFs have performed for the
past 3 years – January 3, 2017 to January 10, 2020.
The #1 ETF is, of course, QLD (2x QQQ) up 198% for 3 yrs, #2 ARKK Innovation etf up 160%, #3 Software IGV 124%, #4 Semi SMH +99%, #5 Internet FDN tied with Aerospace XAR at +80% each.
It pays to invest in innovation.
The ARK Innovation etf - Its Mission: find disruptive, innovative co's in Fintech, Genetics, Artif Intell and Biotech and it's up 160% from 2017, and up 47% for 2019. The only caveat: It can get overheated, especially with Tesla the #1 holding at 9.5% of the ETF.
Worst Sector ETF of the decade, last 3 years and last 12 months?
Why, it’s Energy XLE down an incredible -20% past 3 yrs, and only up
11% in 2019, in a year that saw the SP500 rise 39% from the 12/24/18 low.
Also not great past 3 years: Retail +2%, Banks +7% and Real Estate +12%.
ARKK Top 10 holdings and % weight:
FRIDAY 1/10/20 12:45 pm
We are seeing some selling in several sectors at this time, notably Defense, Aerospace, Banks and Semi's. Not a lot of volume yet, but selling nonetheless, although most gains/losses are fractional.
We are watching the XAR Aerospace, and the ARKK etf closely here, as they could roll over. Banks another to monitor, although we are not currently invested in the Bank etf KBE. The Defense etf ITA another to keep an eye on, down 1.3% today.
ARKK is down .7% today, and XAR -1%. We may post sell stops for both. See Top 3 Sector Portfolio below.
Moving up: Emerg Mkts +.6%, Bonds .8% and GDX 1.2%.
Also - the JPM Health Conference begins Monday, and we expect some big announcements on new drug trials as the days unfold in San Francisco. It is the biggest health conference of the year, with hundreds of companies posting results, and announcing new drugs.
We continue to like Biotech etf XBI, up 45% past year, but it has sold down a bit in the past few days, could see profit-taking.
Read all about the MOST SIGNIFICANT BIOTECH STOCKS for 2020 here:
Sectors at the close Friday 1/10/20:
The Dow Jones Industrial Average closed 133.13 points lower, or 0.5% at 28,823.77. Earlier in the session, the 30-stock average broke above 29,000 for the first time ever. The S&P 500 lost 0.3% to end the day at 3,265.35. The Nasdaq Composite also dipped 0.3% to 9,178.86.
Boeing was responsible for much of the Dow's drop, as BA fell 2% on revealing internal documents that openly mocked FAA regulators regarding the 737 Max.
The Advance/Decline line was 1350/1500, Dollar down .1%, Oil -.7%, Bonds up 1%, with the 10 year bond yield 1.83%.
The VIX remains firmly in the ‘no fear’ camp at 12.56, while gold moved up slightly with GDX rising 1.5%.
Sectors under pressure included Defense -1.3%, Aerospace -1%,Biotech -1% and Semiconductors -.8%. Volume was very light, with the SPY trading only 53 million shares for the day.
The U.S. economy added 145,000 jobs in December. Economists polled by Dow Jones expected the U.S. economy to have added 160,000 jobs in December.
Wages also disappointed, growing by just 2.9% on a year-over-year basis. Economists had forecast a gain of 3.1%. That was the lowest reading in 17 months.
Jobs added for all of 2019 were 2.1 million, compared to those added in 2018 totalling 2.7 million, indicating a sizeable drop in the latest year. Analysts pointed to Boeing as one possible drag on job creation during 2019, shaving a potential .4% off of GDP from BA alone.
The weaker-than-expected data propped up safe havens such as Treasurys and gold. The benchmark 10-year yield fell to 1.83% from around 1.86%. Gold futures, meanwhile, rose to trade marginally higher.
Intuitive Surgical (ISRG) and NortonLifeLock (NLOK) wrestled for top slots in both the Nasdaq 100 and the S&P 500. NortonLifeLock bolted 2.7% higher, after the data security services provider declared a special, one-time cash dividend of $12 a share late Thursday.
Intuitive Surgical, rallied 2.9% as the maker of robotic surgical tools provided preliminary fourth-quarter revenue guidance comfortably above analyst expectations.
In Biotech, Moderna popped 20% higher in early trading after reporting positive Phase 1 trials for its treatment of CMV. Biotech and Pharma sectors are also rallying in anticipation on the JPM drug conference next week.
And in the Semi sector, Qorvo, Skyworks and Nvidia all ran 1%-2% higher as they received multiple upgrades and price target hikes on Friday.
Boeing (BA) shares dropped 2%, after it released internal documents that showed employees tried to manipulate regulators about the 737 Max. The New York Times notes that Boeing internal emails showed employees openly mocking federal regulators, including the now infamous comment, “this airplane is designed by clowns, who are in turn supervised by monkeys.”
A group of Boeing test pilots agreed that they wouldn't want their families flying with pilots trained on the new Boeing 737 MAX 8 flight simulator.
"Would you put your family on a Max simulator trained aircraft? I wouldn’t," one employee said to a colleague in another exchange from 2018, before the first crash. "No," the colleague responded.
As the New York Times explains, the release of these communications, both emails and instant messages, is "the latest embarrassing episode for Boeing in a crisis that has cost the company billions of dollars and wreaked havoc on the aviation industry across the globe."
STOCKS IN THE NEWS
GrubHub (GRUB) – GrubHub denied a Wall Street Journal report that it was mulling options that included a possible sale. In a statement to CNBC, the food delivery service said there was “unequivocally no process in place to sell the company and there are currently no plans to do so.”
Boeing (BA) – Boeing released internal messages that showed harsh criticism from workers about the development of the now-grounded 737 Max jet. Boeing said the messages were “completely unacceptable” and “do not reflect the company we are and need to be.”
Eli Lilly (LLY) – The drugmaker bought skin disease specialist Dermira (DERM) for $1.1 billion in cash, or $18.75 per share. The price is 2.2% above Dermira’s Thursday closing price, but Dermira shares had more than tripled over the past three months.
Amazon (AMZN) – Amazon is in talks to sell some of its ad inventory on services other than its own Fire TV platform, according to people familiar with the matter who spoke to The Wall Street Journal.
NortonLifeLock (NLOK) – NortonLifeLock declared a $12 per share special dividend, representing a return of more than $8 billion to shareholders in the cybersecurity company. The company said the payout would let it reach its goal of returning more than 100% of the proceeds from the sale of its enterprise security business to Broadcom (AVGO).
Intuitive Surgical (ISRG) – Intuitive Surgical released a preliminary quarterly earnings report showing better-than-expected results, driven by an increase in procedures performed with the company’s da Vinci robotic surgical devices. Intuitive Surgical will release its official results on Jan. 23.
KB Home (KBH) – KB Home reported quarterly earnings of $1.31 per share, 2 cents a share above estimates. The home builder’s revenue came in below Wall Street forecasts. Orders came in above forecasts, but the average sale price was slightly lower.
Urban Outfitters (URBN) – Urban Outfitters reported a comparable holiday season sales increase of 3% but said sales fell at its flagship Urban Outfitters apparel stores. The retailer said profit margins were weaker for some of its brands due to increased promotional activity.
WD-40 (WDFC) – The lubricant maker reported quarterly earnings of 88 cents per share, 10 cents a share below estimates. Revenue also fell short of analysts’ estimates. The company said the quarter does not reflect the level of revenue growth it would like to see, but added it expects a “solid, steady year ahead.”
Nvidia (NVDA) – Citi added the chipmaker to its “catalyst watch list,” expecting Nvidia to outperform its peers. Citi said Nvidia will be helped by improving data center demand as well as the closure of its deal to buy networking products maker Mellanox Technologies.
Foot Locker (FL) – Susquehanna Financial downgraded the athletic footwear and apparel retailer’s stock to “neutral” from “positive,”, after Susquehanna’s channel checks points to holiday sales that fell short of expectations.
Sectors Up at close
GDX +1.3%, Bonds 1%, Real Estate .7%, Builders .6%, Emerg MKts .5%
Defense -1.5%, Banks -1%, Aerospace -1%, Biotech -1%, Semi's -.8%
Select Stocks at the close:
Investors pour into leveraged long ETFs (like QLD), warning sign:
SP500 price versus sales valuation, as high as year 2000:
China internet etf - KWEB, breaking out, and up 38% from August:
XAR - Aerospace etf - note the sell stops:
FIVE STOCKS CONTROL THE SPY AND QQQ
Both the SPY and QQQ are totally driven by
Those 5 stocks represent an enormous portion of each ETF.
Microsoft, Apple, Google, Amazon and Facebook.
For past 12 months, MSFT is up 72%, AAPL 112%, GOOGL 45%,
AMZN 40% and FB 77%. Not too bad huh?
For SPY they represent 17% of the ETF, and for QQQ they are a staggering 44% of the entire fund! Now that's top heavy!
When investors pour into the biggest ETF in the world - the SPY- they are buying those same 5 and ditto for QQQ. Watch these leaders for market direction, and hope they don't all go down at once. Ha!
AIRBUS THE NEW AIRCRAFT LEADER IN MARKET SHARE
TOP 3 SECTOR PORTFOLIO UPDATE
Followers of our Top 3 Sector Portfolio have been well rewarded in the last 12 months. As of 1/10/20, the portfolio is up 95% in that time (from 12/24/18 mkt low). The SP500 is up 39%.
We are beating the benchmark SP500 by 56% in the last year. Keep in
mind that 91% of mutual funds and 87% of actively managed funds did not beat the SP500 performance last year.
Our QLD (2x QQQ) is still the #1 performer - up +122%, #2 Biotech XBI +48%, #3 ARKK Ark Innovation +48%. Our QLD position has grown substantially in the last 12 months, and we will trim it back in January 2020.
We will continue to track performance for the Top 3 Sector Portfolio
from the 12/24/18 pivot market low, preferring to measure gains off
of significant highs and lows, rather than by the calendar year.
MARKET OUTLOOK 1/7/2020:
The new year begins, and the inflows to stock funds are running hot.
China deal a go for January 15, Brexit on a good track, and stock indexes are hitting new highs every day.
Except the Russell 2000.
But even as we hit new highs, we remain cautious going forward.
With QLD up 122%, ARKK +48% and Biotech XBI up 49% for the past twelve months, it is an ideal time to take some money off the table. As such, we will post sell stops as necessary in the coming weeks. Please make sure you have set your own stops to avoid losing your gains. We may see some profit-taking in January, as investors wanted to avoid CG taxes for 2019.
We are a bit concerned at the high valuations in the indexes, as well as the extreme levels of sentiment, as seen in the massive inflows into the 2x and 3x leveraged funds, and the lowest short interest in the SP500 in 2 years (see charts above).
Now that we are in the new year of 2020, we continue to anticipate
a pull back in January. The correction will probably start in the 3rd week of January as earnings begin to pile in, but could get delayed into February. Hold off on new investments until after that.
Semi's have had a great run, up 77% in the past year, but we are seeing signs of a possible roll-over. Keep an eye on SMH, and sell if it falls below 137.
Also watching the biggest driver of the QQQ - Apple - with a remarkable 112% gain from the 12/24/18 low. At some point, Apple will correct, and we will set stops for the QLD if needed, as the QQQ will follow Apple.
We will be watching one indicator - the QID (2x short QQQ) to tell us when the market will turn. Until we get a buy signal, we will stay long.
But please check our sell stop section in the coming days.
Remember, if your portfolio manager was not up +39%* for 2019, fire them and buy SPY (with .1% expense ratio!).
And of course, always follow the Top 3 Sector Portfolio. Sector investing
works - as seen by the performance.
Especially for industries like Biotech - where a single stock can fall 50% in a day if a Phase 3 trial for a blockbuster drug fails. Like SAGE Therapeutics which fell -61% on 12/5/19 due to a drug trial failure.
Biotech etf XBI in our portfolio is up +48% in the past 12 months,with 80% less risk than an individual biotech stock..
* SPY +39% gain for 2019 plus 1.8% dividend - Total return +41%.
TOP 3 SECTOR PORTFOLIO & TOP 7 STOCK PORTFOLIO
TOP 3 SECTOR PORTFOLIO PERFORMANCE
PAST 12 MONTHS
As of 1/10/20, the Top 3 Sector Portfolio is up 95% in the past 12 months, (from 12/24/18 mkt low). The SP500 is up 39%.
We are beating the benchmark SP500 by 55% so far in 2019.
Our QLD (2x QQQ) is still the #1 performer - up 122%, #2 ARKK Ark Innovation +48%, #3 Biotech XBI +47%
TOP 3 SECTOR PORTFOLIO - Buy/Sells
S. 1/3 ARKK @ 51.54
S. 1/3 XAR @ 112.73
TOP 3 SECTOR PORTFOLIO PERFORMANCE 2019
(From 12/24/18 low to 1/10/20)
ETF SECTOR PRICE 12/24/18 % Gain
Index Allocation 40%
QLD (38%) Nasdaq 2x 58.52 +122%
IVW (2%) SP500 Growth 140.49 42%
Index Subtotal: + 117%
SOCL Social Media 26.60 +38%
XBI Biotech 65.42 48%
FDN Internet 107.21 35%
BOTZ Robotics 16.33 B. 12/26/18 39%
ARKK Ark Innovation 35.58 12/26/18 48%
IGV Software 214.22 10/30/19 15%
XAR Aerospace 106.26 Trfrd 11/4/19 8%
Sector Subtotal: +39%
Dividend Stock 7%
VIG Divid Apprec 2% Div* 90.55 B. 12/26/18 +39%
Dividend Stock Subtotal: +39%
IEMG Emerg Mkts 2% div 48.59 B. 9/4/19 +13%
International Subtotal: +13%
TOTAL PORTFOLIO for 2019: +95% SP500 +39%
TOP 7 STOCK PORTFOLIO PERFORMANCE 2019
(From 12/24/18 Low, as of 1/10/2020)
Stock Company Price on 12/24/18 % Gain
AMZN Amazon 1343.96 +42%
SBUX Starbucks 60.56 49%
MA Mastercard 174.65 78%
SQ Square 50.72 36%
MSFT Microsoft 94.13 73%
Total Return 2019 +55% SP500 +39%
TOP 7 STOCK PORTFOLIO UPDATE
Note: Currently we hold only 5 stocks, since we recently sold 2 positions. Will advise on new purchases.
Sector ETF Performance For Past 12 Months
Here are all sector ETFs we track with performance for 2019 through 1/10/20 (from the 12/28/18 market low).
Our QLD (2x QQQ) is now up 122% for 2019. The #2 slot went to Semi's at +78%, and #3 Builders at 58%.
Worst: Global Bonds 6%, Energy 11%,
The SP500 is now up 39% for 2019.
SELECT STOCK* PERFORMANCE for Past 12 months
(From 12/24/18 low to 1/10/20)
SNAP #1 +256%, AMD 193%, Caesars 130%, CMG +122%.
Laggards: Macy's -37%, Sina -22%, Baidu -9%.
SP500 up 39% for 2019.
*This list of "Select Stocks" represents key companies in each sector we track. They are meant to be bellwether indicators, and rather than cram a ton of stocks in just to cover all the favorites, this keeps the list to a minimum, allowing easier observation of where the money is flowing.
CHARTS TO WATCH
QQQ Weekly Chart:
SPY shorts fall to new lows as most hedge funds go 'all in' long...
Capex for corporations is all about tech spending. Tech spending now challenging Defense:
2x QQQ etf QLD up 928% in the past 7 years:
GOOGL breaks out:
Semi SMH the #1 Sector ETF we track for 2019, up 77% in the past 12 months.
FACEBOOK - Breaking out.
What a move for Tesla, +141% in the last 7 months.
After 12 months of redemptions, Equity Flows show a big turn coming...
As the SP500 rose +36% in 2019, investors sold funds all year long:
TD Ameritrade "Investor Movement Index" shows that retail buyers returned in November, after 8 months of declines.
Is it sign of a top? Probably not, but ...
Skyworks Weekly Chart - unstoppable:
Microsoft Monthly chart - just amazing: up 470% past 6 years
Social Media ETF - SOCL may break out
SECTOR ETF PERFORMANCE - PAST 3 YEARS
Let's take a look at how the Sector ETFs have performed since January 2017, about 3 years. (All gains up to 1/10/20).
QLD - 2x Nasdaq is #1 with a gain of 198%, ARKK 159%, Software 124%, Semi's 99%. QLD's 3 yr performance is equal to an average yearly return of 67%. Not too bad!
Worst 3 yr performance:
Energy -21%, Retail +2%, Banks +7% - none of them great investments for the past 3 years.
One important comparison: Look at how Russell 2000 small caps did versus the Nasdaq during this time. The QQQ was up 85% last 3 yrs, Russell IWM only +22%. That is a huge under performance for small caps. SPY benchmark was +46% in same time frame.
No surprise that ARKK with its heavy biotech/A.I./genetic weighting
in all things innovative, is up 159% since 2017.
Software also strong +124%, with Semi's +99% as earnings came in, and demand for chips in so many industries remains strong.
LONGER TIME FRAME - BONDS VERSUS STOCKS -
WHO WINS IN PAST 10 YEARS?
For the last 10 years, the SP500 is up 12.5% per year, and
+14.7% per year with reinvested dividends.
The SP500 has risen +309% in the last decade, but is up 403% with re-invested dividends.
20 year treasury bonds (TLT) have given you a 6.5% avg return
per year (including its 2.3% yrly yield).
TLT is up 39% in price for 10 years, and up 25% in yield, for a total return of 64%. The SP500 is up 403% in the same time frame with reinvested dividends.
We'll take the SP500 return over any bond, any time frame.
And it is the U.S. market has been the place to invest, rising 13.5% a year for the past 10 years, versus the world index (EFA) up 5.5% and Emerging Mkts' dismal 3% gain per year.
Top 3 Sector Portfolio Strategy
Our investment strategy is unique. We invest solely in ETFs, both long and short, with an emphasis on Sectors, as they always outperform indexes.
We will also use 2x ETFs, focusing on 4 key indexes only (SSO, QLD, QID, SDS) as warranted by market conditions. We do not short sectors.
In addition to the "Top 3 Sector ETF Portfolio," we also feature an all stock portfolio entitled "Top 7 Stock Portfolio," utilizing the same criteria for selection of stocks as the Top 3 Sector Portfolio.
WHAT DOES "TOP 3 SECTOR" MEAN?
The term 'Top 3 Sector Portfolio' comes from a phenomenon we call the
"Top 3 Effect," where the top 3 sectors that emerge from a pivot high or low, tend to outperform for longer durations.
After a flush out low, the best 3 ETFs will continue to outperform 2, 3 or 6 months later.
Here's an example of this effect:
The first time period is from January 2017 through 11/18/19 (roughly 3 yrs).
The second period is the 2019 ETF performance through 11/18/19 (past 12 months).
From Jan. 3 2017 (3 yrs) From 12/24/18 to 11/18/19 (2019 YTD)
Let's look at the first chart from Jan. 3 2017 through 11/18/19, or
the approximate 3 year return:
Best 3 ETFs past 3 yrs: 2x Nasdaq QLD +165%, Software IGV 113%, Semi's SMH 89%
When you look at Table 2 - (the 2019 YTD return) we see:
Best 3 ETFs 2019: 2x Nasd QLD +95%, Semi's SMH +67%,
Builders ITB +60%
Note the QLD and Semi SMH are both in the top 3 for both time frames. Also Software was #2 in 3 yr return, and #5 for 2019. Close enough.
So the Top 3 are QLD, SMH, and IGV.
Point being, that the Top 3 that emerged in the longer 3 year
time frame, tend to continue that out performance as we see in
the shorter time frame.
Note also that the #4 best performing etf was XAR Aerospace, which
was #4 in both time periods - up 76% past 3 yrs, and up 51% for 2019.
The top 3-6 will vary a bit, but the first ones off that flush-out low, tend to be the ones still on top 6 months later, and 12 months later, etc.
One other thing to note, the Top 3 tend to 'pull away from the pack'
as time goes on. As time increases this divergence increases.
Note that the Top 3 for the last 3 years are up an average of 121%, but the average of the next tier of 3 drops to 68%.
We have observed this effect over the course of nearly 14 years of trading, giving more credence to the power of the "Top 3 Sector Strategy."
SHORT OR LONG - WE TAKE ADVANTAGE OF THE TREND
The beauty of this strategy is that we make money in both Bull and Bear markets, as we can switch to short ETFs when a positive trend is ending, whereas nearly all mutual funds are long only, which is a definite disadvantage in a downturn.
Since Sectors always outperform indexes, we have a larger portfolio allocation to this area (49%).
For instance, as seen above, as of 11/27/19 the SP500 is up +34% for 2019. But the Semi etf SMH is up 65%, with Aerospace XAR +51%
Yes, sectors always outperform indexes.
In normal market conditions, we allocate as follows:
2 Index ETFs (QLD and IVW)
5 Sector ETFs (This may vary between 4-6 due to mkt conditions)
2 Dividend Stock ETFs (only VIG currently)
2 International ETFs (Europe and Emerg Mkts - only IEMG now)
Our portfolio allocation is currently:
Dividend Stock: 7%
This portfolio strategy is aggressive, and is recommended for experienced investors, especially since we employ the 2x ETFs, as well as Inverse ETFs.
THE POWER OF DIVIDENDS
Dividend Yield ETFs are also critical to outperforming the benchmarks.
Investors are desperate for yield.
We utilize domestic and international dividend stock ETFs (although currently we are in domestic only).
Currently we have VIG for our Dividend Yield allocation. VIG - Dividend Appreciation etf is up 35% in the last 12 months, the #1 performer among its asset group.
Another advantage for dividends is the tax rate of only 15%, as opposed to interest, which is taxed at your current income level.
The power of re-invested dividends for total return is simply amazing.
From January 1990 to today (11/18/19 as of this writing), the SP500 is up 810%. Not too bad for a 29 year return.
But wait, add in dividends reinvested, and that SP500 return rises to an astonishing +1,574%!
Dividends should ALWAYS be reinvested. Always.
Here are the Dividend ETFs we track, with their returns in the past year (as of 1/11/20).
The #1 dividend ETF is VIG - Vang. Div Appreciation fund, one that seeks out companies that are increasing their dividends each year/quarter. VIG is up 36% from the 12/24/189 market low, with a Div yield of 1.7%, giving it a total return of 38%.
That VIG performance is better than Div Aristocrat's 30% return, or Schwab Div Equity's +31%. We hold VIG in the Top 3 Sector Portfolio.
Top 10 Holdings of Top 3 Sector Portfolio ETFs
Note Top 10 stocks % weight of each ETF. Some are heavily top weighted, such as Social Media SOCL with over 65% of stocks in top 10, versus XBI Biotech which only has 20% of the ETF in its top 10 stocks.
The QQQ has 57% of its stocks in the top 10, that concentration helps to explain its outperformance.
Nasdaq 100 etf - QQQ Top 10: 57%
Internet etf - FDN:
Top 10: 48%
Social Media SOCL: 10: 65% Software etf - IGV - 10: 57%
Semi etf - SMH 61% ARKK Ark Innov. - Top 10: 57%
Robotics etf - BOTZ 10: 60%
Aerospace etf XAR: 41% Top 10:
Here's the top 15 for Biotech XBI: Vang. Div Apprec. etf: VIG
Top 10: 20% Top 10: 32%
SP500 Growth etf - IVW - Top 10 - 39%
NUALOLO VALLEY, KAUAI
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