Alpha by Sector

Stocks Strategies

A disciplined, scored equity momentum strategy with multi-signal defensive overlay.

By Randy Harris — AutoPilot Portfolio

Executive Summary

Alpha by Sector is a concentrated, actively monitored equity portfolio that holds 9–18 market-leading stocks across multiple industries. Every position must clear a five-factor scoring threshold to enter and re-earn its place at every monthly review. A four-canary market-health framework governs when to tighten exposure or shift to a defensive posture by scaling into CAOS (Alpha Architect Tail Risk ETF).

The strategy is designed to limit damage, not avoid loss. It reduces drawdown depth and duration during sustained declines — it does not attempt to time market tops or sidestep every correction.

Strategy Overview

Alpha by Sector targets companies that are demonstrating price momentum, accelerating fundamentals, and a clear catalyst for continued outperformance over a 3–12 month hold period. The strategy is always 100% deployed. When the screen produces fewer qualifying names, or when defensive canaries activate, excess allocation flows to CAOS rather than cash.

Investment Universe

U.S.-listed equities
Combined large-cap ($10B+) and mid-cap ($2B–$10B) exposure
Minimum $2B market cap floor for liquidity
No single sector exceeds 35% of total equity allocation
Mid-cap sleeve targeted at 20–30% of total portfolio

Selection Methodology

Every candidate must satisfy all five criteria before entering the portfolio:

1. Price Breakout Confirmation

The stock must have recently broken out to a new 52-week high on volume at least 1.5× its 20-day average. The breakout must be confirmed by a daily close above the prior high, not an intraday wick.

2. Earnings Estimate Revision

Analyst consensus EPS estimates for the next 12 months must have been revised upward by at least 10% in the last 60–90 days. Rising estimates signal that the fundamental thesis is being confirmed and expanded by professional analysts.

3. Revenue Acceleration

The company must be demonstrating quarter-over-quarter acceleration in revenue growth — not simply growing, but growing at an increasing rate.

4. Sector Relative Strength

The stock must be outperforming its sector peers over the trailing 3 months. Large-caps are measured against the S&P 500 and their sector index. Mid-caps are measured against the Russell Midcap index and their sector peers.

5. Forward Catalyst

Each holding must have a credible, identifiable catalyst — an earnings cycle, product launch, regulatory development, or structural industry shift — that supports continued momentum over the hold period.

Quality Overlay

Confirm the company has positive free cash flow. This eliminates names breaking out on cost cuts, financial engineering, or buybacks alone.

Scoring System

Each candidate is scored 1–5 on each of the five criteria, for a maximum score of 25. Scores are assigned at entry and updated at each monthly review.

Score	Status	Action
18–25	Hold	Auto-hold, no action required
13–17	Watch	Hold only if no better-scoring replacement exists
Below 13	Exit	Position is replaced

Replacement rule: A new candidate must score at least 3 points higher than the holding it would replace. This threshold deliberately reduces portfolio turnover and prevents churn driven by marginal score differences.

Age discount: After 9 months, any holding receives a 2-point score reduction at the next monthly review, forcing explicit re-justification of continued ownership.

Position Sizing

Positions are sized by conviction tier, not equal weight:

Tier	Conviction	Score	Allocation per Position
Tier 1	Highest conviction, near-term catalyst	23–25	12–15%
Tier 2	Strong setup, multi-quarter catalyst	18–22	6–10%
Tier 3	Valid thesis, lower near-term conviction	13–17	4–6%

Allocation totals to exactly 100% including any CAOS allocation. No cash reserves.

Risk Controls

Stocks monitored continuously, position exit considered if performance deteriorates
Sector cap and correlation pair limits monitored continuously
Highly correlated pairs within a sector limited to a combined maximum of 25% of the portfolio
All position adjustments are proportional across all holdings during defensive scale-outs (preserves relative weighting and scoring discipline)

Canary Indicator Framework

Four independent signals from different parts of the financial system govern defensive posture:

1. HY Credit Spread

Measures yield premium that high-yield bonds pay over Treasuries. Credit markets typically react to stress before equity markets.

Source: FRED BAMLH0A0HYM2
Green: Below 300bps
Amber: 300–400bps
Red: Above 400bps
Standalone override: Above 500bps triggers 25% scale-out regardless of other canary status

2. NYMO Composite (Breadth)

NYSE McClellan Oscillator — short-term breadth momentum. Uses 5-day average to filter single-day volatility.

Source: StockCharts.com $NYMO
Green: 5-day avg above -25
Amber: 5-day avg below -25, above -50
Red: 5-day avg below -50

3. VIX

Market’s expectation of S&P 500 volatility over the next 30 days. Rate of change matters as much as level.

Source: ^VIX
Green: Below 20
Amber: 20–25
Red: Above 25
Deep red: Above 35

4. DMS Risk On/Off (Proprietary)

Dual-momentum trend signal. Calculated as 25% × 1-month + 25% × 3-month + 50% × 6-month weighted returns on max(IWB, VXUS) versus cash (BIL). Risk On if max equity beats cash on this weighted lookback; Risk Off otherwise.

Source: Proprietary calculation, based on prior month-end data
Green: Risk On
Red: Risk Off
Track record: Caught every major decline from 1980–2026

Defensive Scale-Out Framework

When canaries deteriorate, equity exposure compresses proportionally and CAOS allocation expands. Every position trims by the same percentage — relative weights and conviction structure are preserved.

Trigger Condition	Equity / CAOS	Posture
0–1 red canaries	100% / 0%	Fully Invested
2 red, DMS On	100% / 0%	Fully Invested — Watching
2 red, DMS Off	75% / 25%	Defensive
HY Spread above 500bps alone	75% / 25%	Credit Stress Override
3 red, DMS On	50% / 50%	Heavy Defense Override
3 red, DMS Off	40% / 60%	Heavy Defense
4 red, all including DMS	25% / 75%	Maximum Defense

Design Principles

DMS-weighted triggers reflect DMS’s leading-indicator track record at major turning points
Override at 3 non-DMS reds activates defense when real-time canaries flip red while DMS still lags (fast crashes)
Override at HY 500bps activates defense on standalone credit stress
25% equity floor at maximum defense retains high-conviction core for the eventual recovery

Review Cadence

Condition	Frequency
Normal (all canaries green)	Every 2–4 weeks
After scale-out activation	Weekly until canaries normalize
After two consecutive fully-green readings	Return to 2–4 week cadence
Earnings dates	Mandatory hold/trim/exit decision

What This Strategy Does

Holds market-leading stocks with confirmed momentum, rising estimates, and clear catalysts
Maintains 100% equity deployment in normal markets
Scales defensively into CAOS when multiple independent stress signals confirm regime change
Replaces underperforming positions through a disciplined +3 point gap rule
Catches sustained bear markets within 1–3 months of onset

What This Strategy Does Not Do

Does not time market tops — defense activates after meaningful deterioration begins
Does not avoid the first 5–15% of major declines
Does not capture the first 5–15% of major recoveries (deliberately patient on re-entry)
Does not eliminate volatility — momentum portfolios are inherently higher-beta
Does not predict — it confirms and reacts to deteriorating conditions