All transactions are assumed to be at the closing net asset value. Unlike most mutual funds, the Selects are priced hourly during the market day. The maximum 3% load and Fidelity's small transaction fees are NOT included in the percent changes shown. All distributions and dividends are assumed to be reinvested, which has no meaningful effect on the rates and percentages shown. For comparison, the same period returns of the Vanguard Index 500 Fund (symbol VFINX), whose performance is close to the S&P 500 index, are also shown.
It should not be assumed that trades in the future following the Fidelity
Select Switching System will be profitable or will equal the performance of
the trades shown below.
Note: Buy prices marked by a * have been adjusted for a distribution by the fund between the purchase and sale dates. This distribution is assumed to be reinvested in the fund, which has no meaningful effect on the percent changes or overall rates of return shown. Sell or Index Buy Fund Sale/Exchange Buy Recent Percent 500 Date Purchased Date Exchange to: Price Price Change Change 1/4/99 Developing Comm. 3/8/99 Financial Serv. 30.45 34.64 13.8% 4.7% 1/11/99 Energy Service 2/16/99 Health Care 16.66 13.60 -18.4% -1.6% 1/19/99 Developing Comm. 3/8/99 Financial Serv. 34.81 34.64 -0.5% 2.7% 1/25/99 Developing Comm. 3/8/99 Financial Serv. 34.10 34.64 1.6% 4.1% 2/1/99 Technology 3/8/99 Financial Serv. 91.49 88.99 -2.7% 0.9% 2/8/99 Transportation 3/22/99 Energy Service 25.13 25.85 2.9% 4.5% 2/16/99 Health Care 3/29/99 Energy Service 137.86 140.80 2.1% 5.7% 2/22/99 Air Trans. 4/5/99 Developing Comm. 27.64* 29.13 5.4% 4.0% 3/1/99 Financial Serv. 4/12/99 Developing Comm 100.09* 109.27 9.2% 10.1% 3/8/99 Financial Serv. 4/12/99 Developing Comm 103.19* 109.27 5.9% 6.0% 3/15/99 Energy Service 6/28/99 Electronics 16.49 20.75 25.8% 1.8% 3/22/99 Energy Service 6/28/99 Electronics 17.88 20.75 16.1% 2.6% 3/29/99 Energy Service 6/28/99 Electronics 19.34 20.75 7.3% 1.6% 4/5/99 Developing Comm. 5/10/99 Industrial Mat. 38.33* 38.85 1.4% 1.5% 4/12/99 Developing Comm. 5/17/99 Chemicals 40.88 39.39 -3.6% -1.3% 4/19/99 Paper & Forest 6/21/99 Electronics 23.34 23.66 1.4% 0.5% 4/26/99 Paper & Forest 6/21/99 Electronics 23.20 23.66 2.0% -4.7% 5/3/99 Industrial Mat. 6/21/99 Electronics 25.47 24.58 -3.5% -4.3% 5/10/99 Industrial Mat. 6/21/99 Electronics 25.96 24.58 -5.3% -3.3% 5/17/99 Chemicals 6/28/99 Electronics 38.49 37.35 -3.0% -0.8% 5/24/99 Electronics 11/1/99 Insurance 51.97 74.76 43.9% 4.2% 6/1/99 Software 8/16/99 Energy Service 54.64 58.96 7.9% 3.0% 6/7/99 Natural Gas 7/12/99 Technology 14.08 15.20 8.0% 5.0% 6/14/99 Electronics 11/1/99 Insurance 57.55 74.76 29.9% 5.1% 6/21/99 Electronics 11/1/99 Insurance 61.70 74.76 21.2% 0.8% 6/28/99 Electronics 11/1/99 Insurance 62.06 74.76 20.5% 2.1% 7/6/99 Software 8/16/99 Energy Service 63.23 58.96 -6.8% -4.0% 7/12/99 Technology 4/10/00 Insurance 88.39* 169.25 91.5% 8.9% 7/19/99 Electronics 11/1/99 Insurance 66.33 74.76 12.7% -3.5% 7/26/99 Biotechnology 10/25/99 Air Transport 46.74 49.04 4.9% -6.7% 8/2/99 Biotechnology 10/25/99 Air Transport 49.77 49.04 -1.5% -5.3% 8/9/99 Energy Service 10/4/99 Retailing 25.49 21.37 -16.2% 0.7% 8/16/99 Energy Service 10/4/99 Retailing 24.47 21.37 -12.7% -1.8% 8/23/99 Biotechnology 10/25/99 Air Transport 56.08 49.04 -12.6% -7.6% 8/30/99 Biotechnology 10/25/99 Air Transport 54.68 49.04 -10.3% -5.1% 9/7/99 Biotechnology 10/25/99 Air Transport 57.76 49.04 -15.1% -7.0% 9/13/99 Software 2/7/00 Biotechnogy 61.68* 96.66 56.7% 6.5% 9/20/99 Electronics 11/1/99 Insurance 73.52 74.76 1.7% 1.5% 9/27/99 Software 2/7/00 Biotechnogy 60.98* 96.66 58.5% 11.9% 10/4/99 Retailing 11/8/99 Brokerage 61.74 63.77 3.3% 5.6% 10/11/99 Air Transport 11/15/99 Electronics 30.72 31.04 1.0% 4.6% 10/18/99 Air Transport 11/22/99 Software 29.18 30.62 4.9% 13.4% 10/25/99 Banking 11/29/99 Software 38.25 38.55 0.8% 9.0% 11/1/99 Insurance 12/6/99 Software 38.32 37.35 -2.5% 5.3% 11/8/99 Brokerage 12/27/99 Software 43.44* 43.81 0.8% 3.3% 11/15/99 Electronics 1/10/00 Biotechnology 77.12* 90.22 17.0% 4.8% 11/22/99 Software 2/7/00 Biotechnogy 78.52* 96.66 23.1% 0.5% 11/29/99 Software 2/7/00 Biotechnogy 78.11* 96.66 23.7% 1.4% 12/6/99 Software 2/7/00 Biotechnogy 82.45 96.66 17.2% 0.3% 12/13/99 Software 2/7/00 Biotechnogy 87.20 96.66 10.8% 0.7% 12/20/99 Software 2/7/00 Biotechnogy 90.14 96.66 7.2% 0.5% 12/27/99 Software 2/7/00 Biotechnogy 94.31 96.66 2.5% -2.2% To illustrate the use of the table, the "track" starting on 1/4/99, the closest Monday to the start of 1999 is: Buy Fund Sale/Exchange Percent Index 500 Date Purchased Date Exchange to: Change Change 1/4/99 Developing Comm. 3/8/99 Financial Serv. 13.8% 4.7% 3/8/99 Financial Serv. 4/12/99 Developing Comm. 5.9% 6.0% 4/12/99 Developing Comm. 5/17/99 Chemicals -3.6% -1.3% 5/17/99 Chemicals 6/28/99 Electronics -3.0% -0.8% 6/28/99 Electronics 11/1/99 Insurance 20.5% 2.1% 11/1/99 Insurance 12/6/99 Software -2.5% 5.3% 12/6/99 Software Still held(as of 1/3/00) 19.8% 2.4% -------------------------------------------------------------------- Total return for "1999" (1/4/99 - 1/3/00) 58.4% 19.6% accounting for maximum 2% annual management fee 56.4% The calculation for the total return for the track is: (1.138)(1.059)(0.964)(0.970)(1.205)(0.975)(1.198) - 1 expressed as a percent.
The trades listed above illustrate how the system works. It is typical that most of the profits come from one or two large gains each year. In 1996, the best trades were in Retailing, Chemicals, and the trades in Electronics and Computers that were still open at the end of the year. In 1997 the best trades were in Electronics purchased 4/14, although that trade did worse than the index fund, and in Energy Service purchased in April-July. For 1998, the best gainers were Software and Air Transportation purchased in January and Electronics, Developing Communications, Technology, and Computers purchased in September - December. 1999's best trades were in Energy Service purchased in March, Electronics bought in late May and early June, Technology in July, and Software in September or again in late November or early December.
The table shows that some trades may do much worse than the market. Testing on historical data and my actual trading experience show that Select Switching should make up this gap and then some if one will stick with the system. It may take some time. You can use the updates of the table to see how tracks starting with these trades perform against the market. Because sector funds can be quite volatile, I usually recommend that an investment in the Selects using the illustrated methods be phased in using two or three tracks over a period of one or more months. See Implementation Issues under System Description for a more detailed discussion of this topic.
You can see how Pankin's personal and client accounts have performed since November 1993 under Performance. The client accounts are managed using the switching system, but most accounts are invested in more than one fund at a time. This tends to reduce both the returns and the volatility. Consequently, the client accounts' average returns for 1996 and 1997 were less than the 1996 and 1997 returns for the tracks shown above.
No claim is made that the system will perform in the future as it has in the past or as illustrated above. Also, there can be no assurances that the system will produce a profit in the future; it is possible that the system will produce losses.
January 3, 2000:The high tech rally continued through the end of the year, and in some respects 1999 was a "typical" year for the Select Switching System and in others it was not. Counting the Software trade open as of 1/3/00 at which point it was ahead 19.8%, there were seven trades for the year, which is at the upper end of the expected 5-7 per year. On the other hand, three of the seven showed losses, albeit fairly small ones, and that was a bit more than expected. The positive surprise was that three trades showed gains of well over 10% each. We have seen that the bulk of the profits come from one or two big trades a year, so getting three is great, and this was reflected in the 58.4% gain (before any management fees) for the 52 week period January 4, 1999 to January 3, 2000. The older, longer tracks gained 44.6% for calendar 1999, which is also outstanding. All in all, 1999 was the best year shown above, and the second best year (to 1995, not shown here) for the basic trading method since I started using it in late 1993.
December 13, 1999: Like last year, the high technology sectors, which dominate the Nasdaq index, are climbing at an amazing rate late in the year. As a result, the Technology and Software trades from earlier this year are showing returns of over 40% so far. Of course, one should keep in mind that these sectors are quite volatile, especially after large gains, so these trades may end up with much lower (or higher!) percent gains.
We can see now that it would have been better to hold onto Electronics in early November, but no system is perfect. The five week trade in Insurance that followed the Electronics sale produced a small loss while the broad markets and high techs showed substantial gains. The system is now back in Software, which has been the top-ranked fund for the last four weeks. Even with the Insurance result, the system is up almost 40% before fees for the year-to-date while the S&P 500 index fund is up less than half that amount. Nothing to complain about in what has been a perplexing year for some investors. Let's hope the stellar performance continues through a joyous holiday season!
November 1, 1999: The long trades in Electronics (the first dating from May) finally came to end. This was a bit surprising since that fund had a good week and the technology sectors were strong last week. Note that two other technology funds, Technology and Software, did not generate sell signals. The reason for the sale of Electronics is the fund has not performed that well over the longer period that is the basis of the rankings. This is another opportunity to second guess the system, but such actions usually cost more than they gain over the long run. In any case, the results of the Electronics trades starting in May and June are spectacular and much better than the index fund over the same period. They show how the system can make money through a few exceptional trades. Whether the sell signal was well-timed or not, there should be no complaints about the Electronics trades.
October 18, 1999: Last week (10/11 - 10/18) was terrible as the major indicies fell over 6%, and the market may have broken below its trading range. In such times, it is not surprising to see sector funds go down even more. The major victim in the list above was Biotechnology, which fell over 10% for the week. That generated a sell signal, but the damage was done. The early purchases saw healthy gains reduced to modest profits, and the later purchases ended with hefty losses. With the higher volatility, the need for risk control measures such as stop tactics has become greater. An investor using same probably would have sold Biotechnology a week or two ago and avoided last week's disaster.
In spite of last week's action, the high technology sectors--Electronics in particular-- are holding their own and outperforming the index fund as a rule. Purchases last spring are well ahead of the market. Consequently, this year's track, which began on January 4 remains well ahead of the Index 500 fund. Risk sensitive investors who have substantial profits in Electronics may want to consider selling some or all of their holdings to lock in gains. There is no way I can predict with any confidence what the market is going to do as we head into Y2K. I would not be surprised to see either a strong move up, especially in the technology sectors, in the traditionally strong months of November and December or a substantial drop as inflation and Y2K fears bring this long phase of the current bull to a tumultuous end. A large move is a strong possibility, but I have no idea in which direction. The best thing for investors to do is review their long-term (five years or more) plans, determine what level of exposure to stocks is appropriate for the period, and position themselves accordingly. It is always a very bad idea to try to jump in and out of the market based on one's short-term outlook combined with one's fears of losses or missing out on substantial gains . In violent markets like we have now, such behavior likely will be a prescription for disaster.
September 27, 1999: The market continues to move turbulently in the trading range it has been in since May. Some of the indices look like they may have broken the lower bounds of their trading range. I never attempt to predict the short-term direction of the market, but I expect the high volatility to continue until after the next bear market, which will be defined by being scary enough to cause a significant number of "investors" to leave the market. I have no idea when that will be.
The volatility and reversals toward the lower end of the trading range resulted in substantial declines in Select funds and the major indices last week. Currently, the money market fund is #2 on the rankings for buying, being exceeded by a small percentage by Software. Some consider this to be a sign of weakness and an indication that the market may fall further soon. My research shows that the rank of the money market fund is a coincident rather than a leading indicator. That is, it shows how the market has been doing recently, but has no predictive value. The position of the money market fund can be of use to those whose methods call for buying only in strong (or weak) markets and avoiding buying in the opposite type of market. Right now the markets have been weak for a couple of weeks. However, given the high volatility levels, that could change rather quickly.
Some investors like to use a "trailing stop," which means selling when the mutual fund has fallen a certain amount from its recent highest price. That stop can be a specified percentage or determined by some means of technical analysis such as falling below a moving average or penetrating an upward sloping trend line. For trading the Selects, my research shows a 10% drop from the high is the best percentage for a trailing stop. However, the benefits from using a trailing stop at this level average out to be relatively small over a period of years. Consequently, I sometimes look at other factors, such as the overall current condition of the market when deciding whether to sell according to a trailing stop. Biotechnology had fallen a bit over 10% from its recent high as of September 24, so it was a candidate for a sale, particularly if it had been held for at least 30 days. Given the current weak market conditions, I sold that fund in my managed accounts that had owned it for at least 30 days.
August 23, 1999: The high technology trend has become more selective, and Electronics has been the only fund in this sector that has shown continued strength. Biotechnology has also been doing well, and it would not be hard to have a portfolio consisting of these two Select funds, which would seem to be in tune with the current market. Of course, these days things can change rapidly. After strong gains earlier this year, Energy Service seems to have resumed its violent back-and-forth gyrations. Such action can easily whipsaw the trading system. There are probably better approaches to trading this volatile fund depending on whether one expects continued upward movement or quick movements between the extremes of a trading range.
June 21, 1999: The high technology sectors have been showing considerable strength in the past few weeks, which is evidenced by Electronics being the top-ranked fund for the past two weeks and three of the past five weeks. Chemicals has not been a good performer and has been held for the five week minimum period. However, due to the weakness of the broader market, it ranking for sell purposes is just high enough to hold onto it for another week. While it would be tempting to override the system and jump onto the high tech bandwagon, this should not be done. If we are really at the beginning of another huge technology rise, next week will also provide a good profit opportunity. If the strength in the cyclicals that was seen earlier this year comes back, then we should do well holding on to Chemicals. It is important to view any investment strategy as part of a long-term (preferably five years or more) commitment. Viewed in this way, worrying much about what happens day-to-day, week-to-week, month-to-month, and even year-to-year will likely result in deviation from the plan, poor investment results, and considerable unnecessary mental anguish.
May 3, 1999: The recent trend away from technology sectors and toward cyclical basic industries is reflected in the past three week's rankings. Paper and Forest Products and Industrial Materials fit this description. Developing Communications, the top-ranked fund the prior two weeks, is a high technology fund that owns a fair amount of Internet-related stocks.
For the past year or so, volatility has increased and the trends seem to be shorter as they run through their cycles faster than previously. This has detracted from the performance of the Selects Switching System due in part to the five week minimum holding period. That minimum is imposed to avoid Fidelity's 0.75% charge if one sells a Select fund, other than the money market, in fewer than 30 days. Removal of the minimum or the use of stop-loss tactics can result in frequent short-term selling charges, which degrade performance.
One way of dealing with the volatility is to use the Rydex sector funds rather than Fidelity Selects. These funds, which do not have a restrictions on trading or charges for selling too quickly, and a comparison with the Selects are discussed elsewhere on this site. I am recommending that new money to be invested in sectors be put into Rydex sector funds. I am still undecided about the wisdom of moving money already invested in Select funds to Rydex sector funds. Doing so would give up the up to 3% load paid when buying into the Select funds. If it turns out that the Selects work better longer term than the relatively new (since April 1998) Rydex sector funds, then the load would have to paid again when re-entering the Selects.
March 8, 1999: The long run in the high technology funds that started in October 1998 has run its course in the past two weeks according to the trading system. Computers and Electronics were sold a week ago, and this week saw the sales of Developing Communications and Technology. This run in the technology sectors was typical of several we have seen in the past few years in that is lasted by several months and the funds purchased some weeks during the period had gains of well over 20%.
At their peaks, the gains were substantially larger, but in today's more volatile markets it is harder to sell closer to the high points without often cutting short trades that still have substantial gains to come. The Selects Switching System, like most mechanical trading methods, will do better in calmer markets than in the more volatile ones we have been experiencing for the past year or so. This has been the case in the past. Only time will tell whether the current higher levels of volatility are the new standard or the markets will resume their historical behavior patterns.
Interestingly, the funds sold this week, Developing Communications and Technology, showed nice gains since the previous Monday. However, the system looks at the performance over a period of far more than a week to make the hold or sell decision, and on that basis, these two funds were no longer in the top performing group. This can be frustrating if the high tech rally continues, but one must accept that all trading methods are far from perfect. The proper attitude is to be pleased that the system held these funds for another week, which resulted in higher selling prices.
February 16, 1999: The past two weeks have seen the tech sectors leveling off and then starting to drop. The difficult question, as always, is whether this group has peaked and is in for at least several months of poor performance or whether this is just a pause to refresh in a continuing move to even higher prices. I don't claim to have the answer. I'll let my system tell me when to get out of the high tech funds. If one uses a trailing stop at my suggested 10% level, then these funds would have been sold last week. The tables above do not assume use of either an initial or trailing stop. The commentary of Sept. 2, 1998 discusses the effects of stops.
It is likely that in today's more volatile markets the system parameters may be too slow to sell a fund that has moved up by a large percentage. Not being quick to sell has proved to be the correct tactic in the past, but now some funds are capable of giving back a large chunk of their gains in the time the system takes to generate a sell signal. In such cases, the use of a trailing stop to protect profits is probably a good idea. However, one should realize that no trading tactic works all the time, so there will be times when the trailing stop in addition to protecting current profits also avoids future profits if the fund continues its upward movement.
January 25, 1999: The high techs have now been gaining steadily since late October, which was discussed in the December 21, 1988 commentary. Even if the rally falters now, these trades will have been outstanding. In the past high tech runs have lasted as long as six to seven months, and the current one is about three months along, so there is a reasonable chance we may see a month or more of gains in the technology sectors.
Typically, Electronics is the leader during these technology fueled rallies. However, this time Developing Communications is giving Electronics a run for the money since it has been the top-ranked fund in four of the last five weeks. The reason is holdings of interenet releated stocks such as AOL and Yahoo!. However, the fund also holds more seasoned and less volatile stocks such as MCI Worldcom, Ascent Communications, Nokia, Motorola, Texas Instruments, and Cisco Systems.
Energy Service interupted Developing Communication string of being top-ranked with one of its short-lived upward spikes that it has displayed for the past year or so. Given the extreme volatility of Energy Service and its recent tendency to gain sharply and then reverse just as quickly, this fund should not be traded without using a stop-loss as a protective measure. My recommended initial stop level for the Select funds is 7-8%, so the Jan. 11 purchase would have been sold by now had this tactic been employed. Energy Service has produced enormous profits in the past, most recently in 1997, and will do so again some time in the future. The problem is knowing when. If one wants to try to ride this tiger without getting eaten, some sort of protective measure is a must.
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