Selects Switching System Trading Method

The method described below uses a combination of momentum and relative strength. The fund to be purchased is one that has been moving up recently (momentum) and is the best performing among the Selects, which are sector funds (relative strength). Funds are not sold until they are no longer among the best performing Selects (relative strength). Typically, funds are held until they start to drop or their rate of increase slows (momentum).

  1. Eliminate the Gold fund from the list of Selects and include the Money Market fund for a current total of 40 funds.
  2. Once a week (I do it after Friday's close), rank the funds by the their percent change over the past [parameter A] weeks. Buy the highest ranking fund (i.e. the one with the greatest percent gain) the next trading day. If all of the sector funds have fallen, then the money market fund will be the top ranked, and effectively you will be out of the market. This happens rarely; the system does not attempt to "time the market."
  3. Hold the fund purchased for a minimum of [parameter B] weeks.
  4. At that point (after Friday's close), rank the funds by the percent change over the past [parameter C] weeks. If the fund owned is among the top [parameter D] percent (it need not be top ranked), hold it for another week and repeat this step. When it falls out of the top group, switch to the top ranked fund according to step 2 and repeat steps 3 and 4 with the newly purchased fund.

The system has four parameters:

A) the length of the test or ranking period for buying

B) the minimum number of weeks to hold purchased funds

C) the length of the test or ranking period for selling

D) the cutoff percentage for deciding to hold or exchange to another fund

The values of A, C, and D are proprietary and are not disclosed here. The value of B is 5 weeks. This avoids the 0.75% penalty for selling before 30 days that was removed from some of the Selects funds in late 2016 and may be waived at some times for others. My research shows that the fund purchased using the system on the average is not the best performing fund over the next week or two, but it is over the next five weeks, so the value of B probably would be 5 weeks even if there was no penalty for early selling.

The system parameters were developed by extensive research, analysis, and testing on data beginning in January 1987. The oldest Select funds started in 1981, but it was not until 1986 that there were enough of them for this type of trading method to be effective.

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