Here’s How to Select the Top Stocks from the Best Sectors

By TradeSmith Editorial Staff

Listen to this post
In a recent TradeSmith Daily, I shared with you details of one of our many winning strategies: the Sector SPDR ETF strategy.

This is a high-level investment strategy that involves holding the 11 SPDR Select Sector ETFs, which track the 11 sectors that make up the S&P 500 Index. The thing is, you only hold these ETFs if they are in the Green Zone and in a healthy state.

This proven strategy has outperformed the S&P 500 Index over the past 20 years. And the beauty of it is that you participate in the upside of every healthy sector in the stock market using ETFs, so you hold only 11 positions max.

Best of all, this strategy gives you a valuable, automatic exit plan that’s already built in. If any of the sector ETFs fall into the Red Zone, you simply sell and go to cash.

A TradeSmith Exclusive Strategy

Today, I want to brief you on another one of our powerful strategies that also focuses on sectors: the Sector Selects strategy.

This approach goes one step further than our Sector SPDR ETF strategy by drilling down to the top-performing individual stocks in the healthiest sectors. Here’s how it works, and why right now is a great time to use it to search for potential winning stock ideas.

Sector Selects is based on our Sector SPDR ETF strategy, in that at least seven of the 11 S&P 500 sector ETFs must be in a healthy state, in the Green or Yellow zones. Then we filter for the best-performing stocks within these healthy sectors.

To do this, we add a proprietary filter that’s designed to weed out stocks with high average volatility and low trading volume. In addition, we screen only for stocks that are trading at a profit since the most recent Entry Signal triggered.

In the chart below, you can see just how powerful the profit potential can be for our members using the strategy.

If you look closely at the purple line on the chart above, you can see that the strategy would have gotten you out of the stock market and into cash during the bear markets of the early 2000s and 2008.

The Sector Selects strategy has produced 66.17% winning trades, or about two out of every three trades. Plus, those winning trades averaged a sizeable 43.88% gain.

And while not all trades can be profitable, the average drawdown was only 11.47% for trades that didn’t work. That works out to a terrific win/loss ratio of nearly four to one!

Where to Find Sector Selects

Members can access the Sector Selects strategy in TradeSmith Finance via the Invest tab, then the Opportunities tab. I ran this screener just last week, and it returned 20 top stocks from the market’s healthiest sectors.

This list is a great starting point for more research to see which stocks could be a good fit for your own portfolio.

When narrowing down the list, it is best to take other factors into consideration by checking which stocks from the list meet one or more of our other Ideas Lab investment algorithms.

Here’s an example from the screener I ran just last week.

Bristol Myers Squibb (BMY) is a top-ranked stock in the health care sector. The stock just triggered an Entry Signal last Monday, Feb. 14, and as of this writing is in a confirmed uptrend according to our Smart Moving Average analysis.

Besides making the cut as a top-ranked stock in Sector Selects, BMY also matched two of our other proven strategies:

  1. Dividend Growers, due to its consistent dividend growth and rich 3.2% dividend yield
  2. Best of the Billionaires, as it is owned by legendary investors such as Warren Buffett and Ray Dalio
Just to quickly recap, here are the simple rules we follow to produce our Sector Selects strategy:

First, invest in this strategy only if seven or more sector ETFs are in the Green or Yellow zones; otherwise, remain in cash.

Second, filter for the top 20 stocks among the sectors in the Green or Yellow zones. That’s your starting point for more research on these stocks.

Third, narrow the list of potential picks by considering which stocks also meet some of your other favorite investment factors.

Sector Selects can provide you with a powerful set of investment ideas made up of top-performing stocks in the best sectors of the stock market. And that’s an invaluable tool to have by your side in turbulent markets.