Top 3 Sector Strategy | TOP 3 SECTOR

Top 3 Sector Portfolio Strategy

Our investment strategy is unique. We invest in Stocks and in ETFs, both long and short, with an emphasis on Sectors, as they always outperform indexes.

We will also use 2x ETFs, focussing on 2-3 key indexes only (QLD, QID, SSO, SDS) as warranted by market conditions.

In addition to the Top 3 Sector ETF Portfolio, we also feature a portfolio that uses stocks and ETFs called the Aggressive Growth portfolio. We also have a Top 3 Plus portfolio that uses momentum, relatie Strength and Volume to build a portfolio for maximum returns, reserved mainlyh for experienced traders.

LOW COST ETFS ARE THE FUTURE

ETFs are quickly becoming the investment vehicle of choice for both individuals and money managers. The global ETF market is $5.5 Trillion, and growing rapidly.

In the past 4 years, ETFs had $2.3 Trillion of inflows, while $1.2 billlion came out of ‘actively’ traded funds.

PIVOT POINTS

Key to our approach is identifying significant turning points in the broader market. We call these 'Pivot' points, both high and low.

For instance, 10/23/20 represented a Pivot Low as it was the Stock Market low in the Covid Pandemic.

Another great example of a Pivot Low: 10/27/23 when stocks bottomed after a disatrous 2023 that saw the SP500 decline by over 20% and the Nasdaq 100 fall 33%. From that low, the SP500 has risen 27% and QQQ

From the ashes rise the Phoenixes. We track the sectors that emerge first from the destruction. A simple concept. And highly effective.

From this 'ground zero' we apply a unique blend of proprietary indicators consisting of Momentum, MACD, RSI and Money Flow to give us our investing marching orders.

Here's a chart of SPY showing the first Pivot Low on 3/23/2020 which was the Covid low.

It then rallied 109% to 12/27/2021 to a Pivot Hihgh, then fell 25% to the 10/10/22 Pivot Low.

From that low it soared 27% to the 7/17/23 Pivot high, fell to the well known Pivot Low

on 10/27/2023 and is currently rallying off that low for a 27% gain.

Frome the 10/10/2022 pivot low and 10/27/23 pivot low we track which stocks and sectors come up first off that level playing field. Simple as that.

How Our "SELL A THIRD" Algorithm Works-

The Smart Way To Force You To Take Profits

Example: Ebay

How many times have you bought a stock or ETF and watched it rocket higher,

with big gains, only to watch it reverse and roll over, gaining speed

on the downside run, until one day you chart it, and you realize that most

of your hard earned gains have vanished?

If you are like us, you’ve experienced that painful reality all too often. The thing

about stocks, as they say, “most stocks take the stairs up, but the express elevator down.”

One of the most effective tools we use to preserve profits is an analysis program we call “Sell A Third.”

It’s pretty simple. Once a stock has run up anywhere from 40% to 60%, we plot sell stops based on key moving averages, cross overs, and support levels in thirds.

If a stock has peaked and is rolling over, we set the first third sell stop just below the level where the 10 day moving avg crosses down through the 21 Day moving average. Each sell stop in this example is set approximately 8% below the last one.

This chart is based on an actual buy of EBAY we made in our account in April of 2022.

We bought Ebay originally at 41.47 on 4/20/2022. The stock moved higher rapidly after our purchase, ultimately peaking at a high of 81.89 on 10/18/2021. That was a gain of 95%!

It then fell all the way back to 38 in September 2022 and has stayed in that area ever since as you can see on the chart. That was below our original purchase of 41.47,

potentially wiping out ALL of our gains.

It also made that plunge in less than five months, but it took 23 months to rise to the peak at 81.89. Hence the expression “stocks take the stairs up, but the express elevator down.”

But we employed the “SELL A THIRD” strategy and preserved much of our profits.

After the stock peaked in October of 2021, we set a sell stop to sell 1/3 about 8% below the high.

Sell stop 1 triggered on 11/15/2021, giving us a 78.5% gain. The next sell stop

triggered on 12/27/2021 with a +64% gain. The 3rd sell stop triggered on 1/12/2022

for a 52% gain, taking us completely out of the stock.

The smart thing about this system is that if the stock only drops 8%, then bounces,

you still have 2/3 of your investment in Ebay. And many stocks drop that first 8%,

then bounce and continue to new highs, which makes the investor regret it if they had sold it all at once.

We can apply this template to any stock or ETF and it is one of the techniques we use to post our sell stops on the Top 3 Sector Portfolio site. Investors often fall ‘in love’ with a stock and refuse to take profits no matter what.

This program forces you to take profits, and in hindsight, it’s generally a good thing

when a hot stock is skyrocketing to new highs every week and investor sentiment

is getting out of control.

The 10 Day Mov Avg/21 Day Buy/Sell Model -

A Valuable Market Timing Tool

One of the best leading indicators we use to evaluate stocks and ETFs is based on the

10 Day Moving Average/21 Day Moving Average crossover model.

Much like our MACD crossover indicator, a Buy trigger occurs when the 10 Day MA (white line in chart ) crosses above the 21 DMA (green line), and a Sell trigger when the 10 Day crosses under the 21 day average.

We've tested many different moving average formulas, and have found this one to be one of the best buy/sell indicator, especially when the MACD is in synch with the trigger points. It also delivers a precise date on which the crossover occurs, unlike many stochastic charts used in technical analysis. The MACD remains the #1 best timing system, often signalling

well before the 10 day/21 Day MA, but when they are in synch, it is a good confirming factor.

We use this as a template on any new proposed purchase of a security.

Here's the 10 DMA/21 DMA model used on the SPY: Currently: Sell mode

The Seven Percent Rule

The “Seven Percent Rule” is a trading method used to cut losses early.

Most successful investors say minimizing losses is even more important

than picking a winning stock in terms of wealth creation.

Investor’s Business Daily cites this technique as crucial to good money

management.

It’s pretty simple: If a particular holding drops 7%, it’s time to sell.

For us, a loss of -3% to -4% would probably get us stopped out prior.

But let’s see how this works:

Let’s say you have a $10,000 investment in a hot tech stock.

But overnight, negative news sends it down 7%, here’s what happens:

$10,000 x -7% loss = $9,300 left

In order to get back to even, you would only need a +7.5% gain:

$9300 x 7.5% = $700 + $9,300 = $10,000 (back to original)

But if you let that loss increase to -15%, the dynamics change:

$10,000 x -15% = $8,500

$8500 x 18% = 1,500 + 8500 = 10,000

(You would now need an 18% rise to get back to $10,000)

And a -35% loss pretty much guarantees you’ll never get whole

as you would need a +54% move to get even

$10,000 x -35% = $6,500

$6,500 x 54% = 3,500 + 6,500 = $10,000 (takes 54% move to get to $10K)

…At -50% loss, you would have to make 100% to break even:

$10,000 x -50% = $5,000

$5,000 x 100% = 5,000 + 5,000 = $10,000

And just how many stocks go up 100%?

For some investors, this mathematical reality is a given.

But for many others, the idea that if you lose 35%, all you have

to do is make 35% to break even is more commonplace than

you would think.

So don’t forget the “Seven Percent Rule" and remember to cut

your losses short quickly, and let your leaders run.

CNBC Fast Money's Josh Brown:

The Power of Compounded Interest

How many years will it take to double your money? Rule of 72:

Take the number 72 and divide it by the annual rate of return, which gives you how many years It will take to double your money:

% Return # of Years To Double Your Money

5% return (72/5) = 14 yrs

7% return = 10.3 years

9% return = 8 yrs

11% return = 6.5 yrs

13% return = 5.5 yrs

15% return = 4.8 yrs

17% return = 4.2 yrs

25% return = 3 yrs

35% return = 2 yr5

So by increasing your return from 7% a year to 11%, the 'years till double'

falls from 10.3 years to 6.5 years.

With a 14% yearly average return, you would double your money in 5 years, and

a 35% return doubles it in only 2 years.

Note: The "Rule of 72" only works up to a 99% return. Any return

above 100% will result in an error reading. Also rates above 25%

give less accurate estimates of how many years it takes to double.

Historic Rate of Return for Stocks (SP500)

Annualized 50 year average (1971 – 2021) 11% return per year

Last 30 years 10.7%

Last 10 years 15%

So just by being in the SPY etf for the last 10 years, you would have doubled your money every 5 years at a 14% return. No other alternative asset class can beat the consistency of that return.

GOAL OF ALL MONEY MANAGERS: BEAT THE BENCHMARK - THE SECRET TO THE TOP 3 SECTOR PORTFOLIO OUTPERFORMANCE

Most portfolio manager performance is measured against their appropriate benchmark (i.e. small cap funds v.s. Russell 2000 index, or large cap v.s. SP500).

But the main index that most compare themselves to is the annual return of the SP500.

Beating the SP500 is the Holy Grail of equity managers, and unfortunately, 85% of managers have not beaten it in the last 30 years.

Our central mission, and our commitment to our followers is to beat the SP500 every year.

One of the key secrets to overperforming is our strategic use of 2x index ETFs which we restrict to only QLD (2x QQQ), UWM (2x Russell 2000) and SSO (2x SP500).

For inverse 2x ETFs we use QID (2x Short QQQ), TWM (2x Short Russ), and

SDS (2x Sh SP500).

Since history has shown that the stock market goes up about 87% of the time, we use inverse ETFs rarely, and usually for a very short time span, as stocks tend to take the stairs up and the express elevator down.

Shorting stocks can be very rewarding, and also devastating if it goes against you, and certainly doesn’t give you a lot of time to make up your mind whether to cover or stay short. Gains can evaporate in a flash as investors rush to cover their bets.

The 2x ETF performance is quite spectacular, with QLD up 360% from the 3/23/20 Pandemic low, versus the Nasdaq Composite’s +124%.

QLD has been the #1 gainer for the Top 3 Sector Portfolio and a big performer in the Aggressive Growth portfolio in the last 2 years as well. As of 9/15/23, the QLD is up

81% for 2023.

Another key element of our strategy is that we look for Sector ETFs that are highly concentrated in the Top 10 stocks, like the Energy Svcs etf OIH where 70% of the entire ETF are in the top 10 stocks or Software IGV with 59% in the top 10 stocks. Compare that to most mutual funds that can hold hundreds of stocks, each weighted about evenly, seriously compromising performance.

Multiple studies have shown that concentrating capital in a few top tier stocks of each sector can significantly improve returns as opposed to an equal weighting of 30 or 50 stocks in a mutual fund.

Another secret to our success, is allocating more money to the top 3 positions in the portfolio - which puts resources in the best performing sectors, greatly improving our returns.

Currently the Top 3 ETFs get 36% of the portfolio. This is an important aspect of our 'Top 3' strategy. Many managers believe that proper asset allocation is the single most important factor in being a successful trader.

Top 3 Sector Portfolio Strategy -

How It Gives You An Edge

Our investment strategy is unique. In the Top 3 Sector Portfolio, we invest in ETFs, both long and short, with an emphasis on Sectors, as they always outperform indexes.

We also use 2x ETFs, focusing on 6 key indexes only (SSO, QLD, UWM, TWM, QID, SDS) as warranted by market conditions. The easiest way to beat the SP500

is to use the SSO which delivers 2x the return. Pretty simple!

We do not short sectors.

We concentrate more resources in the Top 3 performing ETFs, which is a major

contributor to our strong outperformance against other portfolio strategies.

In addition to the Top 3 Sector ETF Portfolio, we also feature the Aggressive Growth

portfolio for experienced investors that utilizes the same criteria for selection of stocks and ETFs as the Top 3 Sector ETF Portfolio.

Our newest portfolio, the Top 3 Sector Stock/ETF/Dividend portfolio is the highest risk/highest reward model, and for experienced investors only investing in highly volatile stocks such at Tesla, Nvidia and Meta.

WHAT DOES "TOP 3 SECTOR" MEAN?

The term 'Top 3 Sector Portfolio' comes from a pattern we call the

"Top 3 Effect," where the top 3 sectors that emerge first from a pivot low, tend to outperform for longer time frames in the future.

After a flush out low, the best ETFs will continue to outperform 3, 6 and 12 months later.

WE PUT MORE CASH INTO THE TOP 3 STOCKS- CONCENTRATION IS KEY TO OUR SUCCESS

Another secret to our success, is allocating more capital to the Top 3 ETFs - which concentrates resources in the best performing assets, greatly improving our returns.

We also look for sector ETFs that are highly concentrated in the Top 10 stocks,

like like the Defense etf ITA, where 74% of the entire ETF is 10 stocks. Compare that

to most mutual funds that can hold hundreds of stocks, each weighted about evenly,

seriously compromising long term performance.

Currently the Top 3 ETFs get 35% of the portfolio. This is an important aspect of our 'Top 3' strategy. Many managers believe that correct asset allocation is the single most important factor in being a successful trader.

The top 3-6 ETFs will vary a bit, but the first ones off that flush-out low, tend to be the ones still on top 6 months later, 12 months later, 2 years, etc.

We have observed this effect over the course of nearly 25 years of trading, giving more credence to the power of the "Top 3 Sector Strategy."

This momentum strategy has been documented by two recent research studies, where stocks that outperformed by a wide margin over a 5 month and 12 month period also delivered a much greater gain longer term. The MTUM Momentum ETF follows a similar strategy.

Here are 3 links to the research done on 3, 6 and 12 month momentum studies:

https://alphaarchitect.com/2016/10/14/how-to-measure-momentum/

https://seekingalpha.com/article/4240540-optimal-lookback-period-for-momentum-strategies

https://www.anderson.ucla.edu/faculty-and-research/anderson-review/momentum

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 - giving them a definite disadvantage when markets decline.

We restrict our inverse ETF exposure to Index ETFs only. They are:

SDS - 2x Short SP500, QID - 2x Short QQQ, TWM - 2x Short Russell 2000.

That's it. We do not short sectors.

We always warn our followers that inverse ETFs are for experienced traders only. And there is always the 1X versions of above etfs:

SH - 1x Sh SP500,

RWM - 1x Sh Russ 2000

PSQ - 1x Sh Nasdaq if you want a bit less risk.

Most important, given the fact that markets go up 87% of the time, going short

is by its very nature a short term trade.

Our trades could last 3 weeks, or 7 days depending on the depth of a correction. It is imperative to set mandatory sell stops when you make the initial purchase of an inverse etf.

THE POWER OF DIVIDENDS

Dividend Yield ETFs are critical to outperforming the benchmarks. Investors today are desperate for yield. Reinvesting dividends is the key to optimizing compounded interest, as it reinvests in shares.

The power of re-invested dividends for total return is simply amazing.

In the last 14 years, from April 16, 2009 to August 25, 2023, the SP500 is up 491%. Annualized gain: 13% per year.

Pretty good return of 491% for 14 years.

But add in dividends reinvested, and that SP500 return rises to +675% ,

which is which is 184% in additional return.

Annualized gain: 15.25% per year.

Over the course of last 75 years, 40% of the capital gain in SP500 was

from dividends.

At a 15% annual return, you double your money in only 5 years.

And that’s why you should always reinvest dividends.

Currently we have the Rising Revenue/Rising Dividend etf RDVY

for our dividend yield exposure. It has a 2.7% dividend and is up 28%

in the past year and a half.

Dividends are Federally taxed at only 15%, (for those with combined married incomes less than $400,000/year). Interest income would be taxed at 26% to 28% plus State tax in the same tax bracket.

Dividends should ALWAYS be reinvested. Always.

Why Dividends Must ALWAYS be reinvested

SPY from March 2009 to 8/25/23 +491%. Nice.

But reinvested dividends: +675%. Nicer.

You can calculate SP500 returns from any year at this site with and without reinvesting the dividends to see for yourself how important reinvesting dividends is to boosting your return.

In the example box below, the SP500 returned 489% from March 2009 to August 2023.

But if you had reinvested those dividends your total return would have been +675%!

https://dqydj.com/sp-500-return-calculator/