Top Picks 2007: John Bollinger targets sector funds

Each year Steven Halpern, editor of TheStockAdvisors.com, surveys the leading financial newsletter advisors asking for their favorite stocks for the coming year. This article is part of his 24th annual Top Picks Report.

Although advisors participating in the Top Picks Report were limited to two stock picks, we allowed John Bollinger to select three, in compliance with the strategy employed in his The Capital Growth Letter.

He explains, "My strategy is not about stock picking in the sense of what will do best in 2007. Rather we ask what is doing well now, invest in that, hold for as long as the performance is satisfactory and then move on. This method is known as the cast-out method of relative-strength investing.

"As an example, let's take a look at our ETF Sector Portfolio. After a careful screening process we have selected 27 sector ETFs as candidates for this portfolio. Let's suppose that we are just starting out. To get going we would purchase the top three ranked ETFs and hold them for as long as they are ranked better than the middle of the list.

"When one of the funds drops below the midpoint of the ranking, it will be sold and replaced with the highest-ranked fund that is not already held in the portfolio. We use daily data and conduct reviews on a weekly basis. There are several other rules, but that's the essence of the program.

"We have found this cast-out approach to relative-strength investing delivers the sort of performance that we are after in our practice, and that it has an acceptable risk-reward relationship. As of December 18th, our top three ranked sector funds are: iShares Global Telecom (ASE: IXP), iShares Select Energy (ASE: XLE), and Powershares Dynamic Media (ASE: PBS)."