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 1/3/00 Biotechnology 3/20/00 Brokerage 67.56 77.54 14.8% 0.3% 1/10/00 Biotechnology 3/20/00 Brokerage 75.34 77.54 2.9% 0.1% 1/18/00 Biotechnology 3/20/00 Brokerage 76.07 77.54 1.9% 0.3% 1/24/00 Biotechnology 3/20/00 Brokerage 79.35 77.54 -2.3% 4.1% 1/31/00 Biotechnology 3/20/00 Brokerage 77.87 77.54 -0.4% 4.7% 2/7/00 Biotechnology 3/20/00 Brokerage 87.30 77.54 -11.2% 2.5% 2/14/00 Electronics 4/17/00 Food & Ag 100.75* 103.45 2.7% 1.0% 2/22/00 Biotechnology 3/27/00 Insurance 97.78 81.68 -16.5% 12.8% 2/28/00 Biotechnology 4/3/00 Insurance 102.96 73.29 -28.8% 11.8% 3/6/00 Biotechnology 4/10/00 Insurance 113.57* 74.04 -34.8% 8.2% 3/13/00 Electronics 4/17/00 Food & Ag 123.63* 103.45 -16.3% 1.4% 3/20/00 Brokerage 4/24/00 Medical Delivery 50.35* 46.82 -3.4% -1.8% 3/27/00 Insurance 7/10/00 Biotechnology 31.38 36.29 21.7% -2.8% 4/3/00 Insurance 7/10/00 Biotechnology 34.17 38.18 11.7% -1.6% 4/10/00 Insurance 7/10/00 Biotechnology 33.31 38.18 14.6% -1.6% 4/17/00 Food & Ag 6/12/00 Electronics 35.59 38.18 9.8% 3.4% 4/24/00 Medical Delivery 6/12/00 Electronics 16.28 17.65 8.4% 1.3% 5/1/00 Automotive 6/5/00 Electronics 23.53 21.93 -6.8% 0.1% 5/8/00 Biotechnology 8/7/00 Insurance 72.64 91.00 25.3% 4.3% 5/15/00 Biotechnology 8/7/00 Insurance 71.44 91.00 27.4% 2.2% 5/22/00 Natural Gas 7/3/00 Health Care 19.56 19.98 2.1% 5.1% 5/30/00 Banking 7/3/00 Health Care 29.49 27.29 -7.5% 3.4% 6/5/00 Electronics 7/31/00 Insurance 118.91 107.39 -9.7% -2.3% 6/12/00 Electronics 7/31/00 Insurance 115.22 107.39 -6.8% -0.8% 6/19/00 Biotechnology 8/7/00 Insurance 89.64 91.00 1.5% -0.2% 6/26/00 Biotechnology 8/7/00 Insurance 89.20 91.00 2.0% 1.9% 7/3/00 Health Care 8/14/00 Insurance 151.32 146.64 -3.1% 1.7% 7/10/00 Biotechnology 8/14/00 Insurance 97.92 91.00 -11.2% 1.2% 7/17/00 Developing Comm. 8/21/00 Electronics 77.56 71.33 -8.0% -0.6% 7/24/00 Brokerage 10/2/00 Medical Delivery 57.70 63.45 10.0% -1.7% 7/31/00 Insurance 11/27/00 Food & Ag 40.79 46.58 14.2% -5.4% 8/4/00 Insurance 11/27/00 Food & Ag 42.72 46.58 9.0% -8.5% 8/14/00 Insurance 11/27/00 Food & Ag 43.12 46.58 8.0% -9.3% 8/21/00 Electronics 9/25/00 Home Finance 121.03 103.36 -14.6% -4.2% 8/28/00 Electronics 10/2/00 Medical Delivery 123.44 98.76 -20.0% -5.1% 9/5/00 Electronics 10/9/00 Medical Delivery 122.72 93.29 -24.0% -6.9% 9/11/00 Biotechnology 10/23/00 Medical Delivery 91.31 97.68 7.0% -6.2% 9/18/00 Home Finance 11/20/00 Environmental 42.57 46.28 8.7% -6.9% 9/25/00 Home Finance 11/20/00 Environmental 44.21 46.28 4.7% -6.5% 10/2/00 Medical Delivery 12/18/00 Home Finance 23.08 25.73 11.5% -7.6% 10/9/00 Medical Delivery 12/18/00 Home Finance 23.16 25.79 11.1% -5.4% 10/16/00 Energy Service 11/20/00 Environmental 36.06 33.04 -8.4% -2.2% 10/23/00 Medical Delivery 12/18/00 Home Finance 23.21 25.73 10.9% -5.0% 10/30/00 Biotechnology 12/4/00 Paper & Forest 92.31 80.83 -12.4% -5.1% 11/6/00 Paper & Forest 1/22/01 Electronics 22.75* 24.03 5.6% -6.0% 11/13/00 Chemicals 1/29/01 Software 34.06* 38.49 13.0% 1.2% 11/20/00 Environmental 1/22/01 Electronics 12.20 12.77 4.7% 0.2% 11/27/00 Food & Ag 1/2/01 Energy Service 44.95* 47.12 4.8% -4.7% 12/4/00 Paper & Forest 1/22/01 Electronics 24.02* 24.03 0.0% 1.5% 12/11/00 Home Finance 1/29/01 Software 51.26* 52.12 1.7% -1.0% 12/18/00 Home Finance 1/29/01 Software 52.66* 52.12 -1.0% 3.2% 12/26/00 Energy Service 4/2/01 Money Market 37.04 34.10 -7.9% -12.6% To illustrate the use of the table, the "track" starting on 1/3/00, the closest Monday day to the start of 2000 is: Buy Fund Sale/Exchange Percent Index 500 Date Purchased Date Exchange to: Change Change 1/3/00 Biotechnology 3/20/00 Brokerage 14.8% 0.3% 3/20/00 Brokerage 4/24/00 Medical Delivery -3.4% -1.8% 4/24/00 Medical Delivery 6/12/00 Electronics 8.4% 1.3% 6/12/00 Electronics 7/31/00 Insurance -6.8% -0.8% 7/31/00 Insurance 11/27/00 Food & Ag 14.2% -5.4% 11/27/00 Food & Ag 1/2/01 Energy Service 4.8% -4.7% -------------------------------------------------------------------- Total return for "2000" (1/3/00 - 1/2/01) 34.0% -10.8% accounting for maximum 2% annual management fee 32.0% The calculation for the total return for the track is: (1.148)(0.966)(1.084)(0.932)(1.142)(1.048) - 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 2, 2001: The year 2000 was an outstanding one for the Select Switching System as the track beginning at the start of the year had a substantial profit while the broad market was down quite a bit for the year. In many ways, the performance was typical. There were six trades, which is just about average and in the middle of the expected range of five to seven a year. The bulk of the profits came from the two largest winners, which were in Biotechnology and Insurance. The other four trades combined resulted in a small profit, which is what we hope will happen for the trades other than the large gainers. The normal expectation is that about 2/3 of the trades will be profitable, and that was the case in 2000 as four of the six trades ended up on the plus side.
In the beginning of the year, Biotechnology and the high technology sectors rose as a rapid pace before falling quickly after mid-March. The system took advantage of this behavior although it was somewhat late selling Biotechnology, but the trade still produced a nice profit. With the exception of a whipsaw trade in Electronics in the summer, the system stayed in less volatile and generally defensive sectors for the rest of the year, which proved to be the right place to be.
November 27, 2000: The trade in Insurance that was completed today shows the power of sector rotation. The tracks shown above purchased that fund on July 31, and the fund gained over 14% in the almost four months it was held while the broad market as measured by the Vanguard Index 500 fund fell by over 5%. There are usually some sectors that gain ground when the market as a whole is falling. The Select Switching System won't always manage to be invested in the best sectors, but it does so often enough to produce healthy profits in many market conditions. Note how the tracks that began at the beginning of this year and last are well ahead of the broad market. The performance this year has been especially impressive gaining almost 28% (before fees) while the index fund is down by over six percent.
The move into Food and Agriculture is typical of the system's ability to move into more "defensive" sectors (people still have to eat no matter the economic health of the country) when the market is troubled as a whole. Of course, if the market turns around and moves up strongly, we will be "stuck" in a relatively slow moving fund for the next five weeks according to the system. However, that "risk" seems quite reasonable as the former high flyers in the technology sectors get marked down on an almost daily basis.
October 16, 2000: Since the beginning of September, the market has been going down. Some sectors have managed to gain ground since then, but at a modest pace. These have been in the financial area, which benefits from the prospect that interest rates will not go higher and may come down, medical and health care, which includes biotechnology, and energy related. Even in these sectors, the ride has been choppy at times.
The general attitude seems to be quite pessimistic now. In addition to fears of an oil crisis due to the turmoil in the Middle East, there are worries that profits will be disappointing overall. Companies that do not live up to Wall Street expectations--Intel and Eastman Kodak are two notable examples--may see their stocks fall by 25% or more in a single day. Given that stock prices seemed to be "priced for perfection" earlier this year, maybe we should not be shocked and surprised. On the other hand, the November through January period is historically the strongest for the stock market, and we have seen gloomy outlooks in a few recent Octobers that were followed by strong rallies, particularly in technology sectors. I would not be surprised if this happens once again, but probably not so strongly as in the last two years. Since I follow formulas in my investment and trading activities, I do not recommend taking action based solely on the pattern of the past few Octobers. However, discretionary traders and chart readers may want to be looking for signs that the decline is over and we are going to get another late-year rally.
September 5, 2000: The market has churned somewhat over the past few months. At various times Biotechnolgy, high tech (Developing Communications, Electronics), and financials (Brokerage, Insurance) have shown strength. However, sectors showing leadership have not remained in that position for more than a few weeks, and the pullbacks have been sharp and fast at times. That has been a characteristic of the markets for most of the year. Given the high level of nervousness of many investors and the quick trigger fingers of a significant number of traders and institutions, there is no reason to expect that the markets' behavior is about to change anytime soon. It will probably take a very scary bear market that chases many participants to the sidelines to reduce the high volatility levels and restore the calmer and more reasonable markets that we saw for much of the 1990s.
June 26, 2000: With perfect hindsight, it now looks like the high technology sectors bottomed out in May and are now moving up. Biotech is once again showing considerable strength. Given how volatile today's markets are, any advances are not likely to be smooth. They will be met with sharp pullbacks every so often. This makes holding on to the strongest sector funds even more difficult than it normally is. The best way to deal with the higher volatility is not to pay very much attention to it. Instead, it is far better to follow the formulas that are part of a well researched trading system. This will not work perfectly, which is true for all investing methods. Some times the system will get shaken out of advancing funds by violent pullbacks. At other times, it will stay too long after the peak and give back more of the open trade profits than one would like, which can be attenuated by the use of trailing stop tactics. However, over a period of several years, a disciplined, formula based approach is almost certain to do better by a large margin than emotional, seat-of-the-pants reactions to the most recent violent market movements and panic inducing "news" reports.
May 22, 2000: The selloff in the techs continues, and most of the gains in the Nasdaq since last November have been given back. Since that represents a 40% drop from the March peak, those numbers are amazing with respect to a) the amount of the drop in such a short time, and b) how little of the gains in terms of time have been given back. After all, last November most were saying how far the Nasdaq had come in the past year or so. Now we are back to the same place with about seven months under our belt. Bear markets usually "undo" more than seven months of gains, so it would not be surprising if the techs are going to drop further.
The first table shows that the last buy of a high tech fund was in March, just before the peak. Since then the system has been selecting primarily financial or defensive sectors. One exception is Biotechnology in the first half of May, which so far has not worked well because that sector continues to fall for the most part, like the high techs, from its March high. In the past few weeks, the strongest sectors of the market have been energy related, which is reflected in Natural Gas being the highest rated fund this week. If we are going to see increasing inflation, which seems to be the Fed's major worry now, then there is a good chance that inflation will be associated with higher energy costs, possibly as both a cause and an effect of the inflation. If so, the trading system has the potential to make some good profits in what may be an otherwise falling stock market.
April 3, 2000: The high techs have fallen sharply as Biotechnology did a few weeks ago. The market's reaction today to the news about Microsoft was the trigger needed to produce waves of selling of the "new economy" stocks by nervous investors/traders. The Selects trading system is still holding its high tech sector positions in Technology and Electronics. Probably, they will be closed out next week, but there may be further damage. Today's more volatile markets move too fast in many cases for the system. That means some type of defensive tactics, such as initial and trailing stops, should be used in conjunction with the system.
The tracks shown above have not owned high tech funds for two months. They got caught in the Biotechnology downdraft, but now are in Brokerage, which is a financial sector. That area of the market has been favored for the past few weeks, but there is no telling how long that will last.
March 20, 2000: The rocket analogy for Biotechnology that I used in the previous two commentaries has proved to be more apt than I expected, including falling back to ground zero, which I did not think could happen. The drop of over 33% in the past two weeks is even more breathtaking than the speed of the climb since December until the peak on March 6. That drop wiped out all profits for the purchases after mid-January, and most of the profits of the earlier purchases.
That sort of drop illustrates the benefits that can result from some type of risk control measure such as an intital or trailing stop-loss tactic. Biotech showed that the price of a stock, mutual fund, or index can go a lot higher than you may think is reasonable or possible, and it can also suprise you on the downside just as much if not more.
The Biotech experience also shows an important advantage that the Rydex sector funds have over the Fidelity Select funds. Because there are no trading restrictions or charges associated with the Rydex funds, I was able to develop methods that permit more frequent trading than my methods for the Select funds. The Rydex Biotechnology fund, like Fidelity's, peaked on March 6, and it has fallen nearly as much since then. However, my methods for trading the Rydex sector funds sold Biotechnology on March 10. The fund dropped 13.3% from the peak to the sale date, but given the incredible rise, the trade produced enormous profits in spite of that drop. The ever increasing volatility in today's markets require much more nimble techniques than are practical for the Selects because of the 0.75% charge for selling within 30 days of purchase.
The high technology funds have also been in a rough period, but have not been going virtually straight down like Biotechnology. There have been a few strong up days mixed in with the dramatic down days. Electronics purchased on February 14 is still up almost 20%, and the Technology purchase last July 12 has more than doubled at the current price. Even Electronics purchased last week has not been hit very hard. The high techs may also be vulnerable to some sharp downward movement, but I hope it won't be anything close to what we saw with Biotechnology.
March 13, 2000: It looks like the Biotech "rocket" has peaked, at least for a while. That fund has fallen dramatically in the last week, which can happen when a fund climbs at an incredible rate for several months. Is it the end of the move? It is hard to say. The formulas I follow, which were developed based on data from generally less volatile times, say to hold on to Biotech for another week. One might want to use a "trailing stop" to lock in profits, but the sequences here do not assume the use of stops. Such stops can be tricky, and they often backfire when the downturn proves to be temporary. There is no clear right answer as to whether they should be used. Each investor has to decide what he or she wants to avoid more: a further price drop or missing out on continued exceptional profits. When that question is answered, the appropriate action can be taken.
February 28, 2000: While the high techs have moved higher in fits and starts for the first two months of the year, Biotechnology has climbed like a rocket. I don't think a Select fund has ever before gained over 50% in just two months. The steepest part of its climb began in December, and it has doubled since then. Like the rocket in the analogy, eventually the fund will stop ascending, but unlike the rocket it will not fall all the way back to ground zero. I have no idea when that will be, and I have no desire to prognosticate the end of the climb. I will let my system, which is based on the price movements of the Select funds, tell me when it is time to move from Biotechnology to another sector fund or into the money market fund.
The trades since mid-1999 show the system operating at its best. Electronics gained over 20%, and in retrospect, it was exchanged into Insurance at a bad time. Software gained over 17% although it did not keep up with Biotechnology over the period it was held, and Biotechnology is up about 18% since being purchased on February 7. All told that is a gain of 62% (before any management fees) in a little over seven months. Interestingly, the system's trades were far from optimal during that period, which can be seen from Technology's gain from mid-July or the gains in Biotechnology since December. That shows that the system does not have to be anywhere close to perfect to produce astounding returns. It is worth noting that current market conditions are ideal for my trading methods. Several sectors are in long and strong trends. As some of the data on this and the linked pages show, there are times when market conditions can "whipsaw" the system, and the results are losing trades and drawdowns that may be uncomfortable for some investors. However, analysis of historical sector fund prices and actual trading experiences shows that times when there are long and extremely profitable trends in sector funds happen regularly and fairly frequently. These times produce exceptional gains that enable the system to be quite profitable in comparison to the broad market if it is followed for a period of several years.
It is important to note that past performance is does not guarantee any future results. It is possible that followers of the system may lose money over any time period, short or long.
Go to Implementation Issues