Finding stocks to avoid among big U.S. equities

WHAT ARE WE LOOKING FOR?

Today we end a week-long series with a look at stocks on the S&P 100 that Ron Meisels, the technical analyst for Phases & Cycles Inc., thinks it's best to avoid - critical for overall portfolio performance.

Mr. Meisels creates a portfolio of favoured stocks from the S&P 100 and calls it his TOP100 (the acronym stands for technically organized portfolio). He uses technical, cyclical and sentimental indicators to sift through the index members.The overweight stocks in the TOP100 during the past three years (the first three-year period in which the fund has been in operation) have outperformed, providing an annual compound rate of return of 14.2 per cent. During the same period, the stocks to avoid have underperformed, declining at an annual rate of 15.5 per cent.

Overweight stocks in the TOP100 have a greater weight than in the S&P 100, while the underweight category in the portfolio has a lower weighting than the S&P 100 or are not included in the portfolio at all. During the past year, the overweight group has increased 26.7 per cent and the underweight group rose 5.3 per cent.

MORE ABOUT THE TOP100

The main tool he uses to make both his top-down (sector weights) and bottom-up picks (individual companies) is the relative performance index. The index compares each sector's price performance against the S&P 100 or it compares each security against its own sector index for outperformance (a rising index) or underperformance (a declining index). Analysts at Phases & Cycles look at the portfolio twice a month and publish monthly, unless something drastic happens, Mr. Meisels said. In the past year, the TOP100 portfolio increased 11.3 per cent, compared with an 11.1-per-cent rise in the S&P 100. WHAT WE FOUND

The TOP100 underweight sectors clearly point to the defensive orientation of the fund in July. It recommended only a 6.5-per-cent weighting in energy stocks, compared with a 12.2-per-cent weighting in the S&P 100. Financials were also underweight in the TOP100 at 12 per cent, compared with 16.2 per cent on the S&P 100. Cash holdings in the TOP100 rose to 10.3 per cent in July, from 3.5 per cent in the past month.

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