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 12/31/01 Energy Service 2/11/02 Paper & Forest 29.58 28.45 -3.8% -3.0% 1/7/02 Networking 2/11/02 Paper & Forest 3.25 2.78 -14.5% -4.4% 1/14/02 Networking 2/19/02 Chemicals 3.12 2.51 -19.6% -4.7% 1/22/02 Home Finance 3/11/02 Wireless 52.31 54.78 4.7% 4.6% 1/28/02 Home Finance 3/11/02 Wireless 52.96 54.78 3.4% 3.3% 2/4/02 Energy Service 6/17/02 Medical Delivery 27.89 34.17 22.5% -4.9% 2/11/02 Paper & Forest 4/15/02 Automotive 27.71 29.70 7.2% 1.0% 2/19/02 Chemicals 4/29/02 Energy Service 41.81* 43.24 3.4% -1.4% 2/25/02 Energy Service 6/17/02 Medical Delivery 31.06 34.17 10.0% -6.2% 3/4/02 Energy Service 6/17/02 Medical Delivery 32.26 34.17 5.9% -10.4% 3/11/02 Wireless 4/15/02 Automotive 4.33 3.77 -12.9% -5.5% 3/18/02 Wireless 4/29/02 Energy Service 4.15 3.53 -12.3% -8.5% 3/25/02 Natural Gas 5/20/02 Chemicals 19.41* 19.65 1.2% -3.3% 4/1/02 Medical Delivery 8/12/02 Health Care 28.81 28.65 -0.6% -20.7% 4/8/02 Medical Delivery 8/12/02 Health Care 29.47 28.65 -2.8% -19.2% 4/15/02 Automotive 6/10/02 Medical Delivery 28.45 27.62 -2.9% -6.3% 4/22/02 Medical Delivery 8/12/02 Health Care 31.02 28.65 -7.6% -18.0% 4/29/02 Energy Service 6/17/02 Medical Delivery 36.27 34.17 -5.8% -2.5% 5/6/02 Energy Service 6/17/02 Medical Delivery 36.01 34.17 -5.1% -1.4% 5/13/02 Energy Service 6/17/02 Medical Delivery 37.49 34.17 -8.9% -3.4% 5/20/02 Chemicals 8/26/02 Telecomm 46.62 43.15 -7.4% -12.8% 5/28/02 Electronics 7/1/02 Chemicals 43.52 32.62 -25.0% -9.7% 6/3/02 Multimedia 7/8/02 Chemicals 34.30 29.54 -13.9% -6.0% 6/10/02 Medical Delivery 8/12/02 Health Care 32.70 28.65 -12.4% -12.0% 6/17/02 Medical Delivery 8/12/02 Health Care 32.96 28.27 -13.1% -12.5% 6/24/02 Medical Delivery 8/12/02 Health Care 31.36 28.27 -8.6% -8.8% 7/1/02 Chemicals 8/26/02 Telecomm 45.14 43.15 -4.4% -1.8% 7/8/02 Chemicals 8/26/02 Telecomm 44.66 43.15 -3.4% -2.7% 7/15/02 Wireless 8/19/02 Telecomm 2.82 2.72 -3.5% 3.8% 7/22/02 Money Market 9/16/02 Telecomm 1.00 1.002 0.2% 9.0% (interest earned) 7/29/02 Money Market 9/16/02 Telecomm 1.00 1.002 0.2% -0.6% (interest earned) 8/5/02 Biotechnology 9/16/02 Telecomm 34.86 36.71 2.8% 7.0% 8/12/02 Health Care 9/30/02 Medical Delivery 102.88 97.49 -4.7% -9.6% 8/19/02 Telecomm 1/21/03 Multimedia 20.51* 26.83 30.8% -6.0% 8/26/02 Telecomm 1/21/03 Multimedia 21.76* 26.83 23.3% -5.7% 9/3/02 Telecomm 1/21/03 Multimedia 20.53* 26.83 30.7% 1.8% 9/9/02 Telecomm 1/21/03 Multimedia 21.37* 26.83 25.6% -1.1% 9/16/02 Telecomm 1/21/03 Multimedia 21.40* 26.83 25.4% 0.2% 9/23/02 Multimedia 12/16/02 Natural Gas 27.88 35.47 27.2% 9.6% 9/30/02 Medical Delivery 11/4/02 Telecomm 29.79 27.72 -6.9% 11.5% 10/7/02 Medical Equip. 11/18/02 Networking 14.52 15.35 5.7% 14.9% 10/14/02 Medical Delivery 11/18/02 Networking 30.78 25.79 -16.2% 7.2% 10/21/02 Software 1/21/03 Multimedia 33.69 37.13 10.2% -0.9% 10/28/02 Software 1/21/03 Multimedia 33.82 37.13 9.8% 0.1% 11/4/02 Telecomm 1/21/03 Multimedia 25.44* 26.83 5.5% -1.9% 11/11/02 Networking 1/21/03 Multimedia 1.39 1.58 13.7% 1.6% 11/18/02 Networking 1/21/03 Multimedia 1.58 1.58 0.0% -1.1% 11/25/02 Networking 1/21/03 Multimedia 1.73 1.58 -8.7% -4.6% 12/2/02 Electronics 1/6/03 Defense & Aero 31.06 27.01 -13.0% -0.4% 12/9/02 Energy Service 1/13/03 Networking 29.39 27.24 -7.3% 4.0% 12/16/02 Natural Gas 2/18/03 Energy 17.46 16.78 -3.9% -6.2% 12/23/02 Natural Gas 2/18/03 Energy 17.43 16.78 -3.7% -4.9% 12/30/02 Indus. Materials 2/24/03 Energy Service 24.06 23.66 -1.7% -5.1% Money Market fund assumed to earn interest at a 1.50% rate. To illustrate the use of the table, the "track" starting on 12/31/01, the first Monday and first trading day of 2002 is: Buy Fund Sale/Exchange Percent Index 500 Date Purchased Date Exchange to: Change Change 12/31/01 Energy Service 2/11/02 Paper & Forest -3.8% -3.0% 2/11/02 Paper & Forest 4/15/02 Automotive 7.2% 1.0% 4/15/02 Automotive 6/10/02 Medical Delivery -2.9% -6.3% 6/10/02 Medical Delivery 8/12/02 Health Care -12.4% -12.0% 8/12/02 Health Care 9/30/02 Medical Delivery -4.7% -9.6% 9/30/02 Medical Delivery 11/4/02 Telecomm -6.9% 11.5% 11/4/02 Telecomm Still held as of 12/31/02 0.5% -3.3% -------------------------------------------------------------------- Total return as of 12/31/02 -21.8% -21.3% accounting for maximum 2% annual management fee -23.8% The calculation for the total return for the track is: (0.962)(1.072)(0.971)(0.876)(0.953)(0.931)(1.005) - 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. You can use the links on these pages to see the lists of trades for prior years and see which ones have been the big winners. Some of them have been truly amazing. To provide balance, there have also been some large losing trades, which is one reason that using a stop-loss tactic is a good idea.
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.
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.
December 31, 2002: Another disappointing year in the market is over. The Selects Switching method had a wild year with some very large gainers, but also some very large losers. Given the unsettled and highly volatile markets we have been seeing, such behavior is hardly surprising. It emphasizes the need for risk control tactics. The easist is simply limiting one's exposure to volatile investments, and sector funds certainly fit that discription. My usual recommendation is that sector funds should comprise no more than 20% of one's equity holdings, and those who are somewhat conservative or risk-adverse, will feel more comfortable with a maximum of 10%.
For the year 2002, the track starting on 12/31/01 essentially matched the Vanguard index fund as both were down over 21%. Counting the Telecommunications trade still open at the end of the year, there were seven trades during the year, which is at the high end of the expected 5-7 range. Five of the trades were losers, and the one open at the end was barely above water. The two trades in Medical Delivery were particularly disappointing and turned out to be the two worst trades of the year. Clearly, the system experienced whipsaws trading that fund. The June purchase tracked the index fund during a particularly bad period. In a sense the late September purchase of Medical Delivery was the largest system failure during 2002. Not only did that fund not participate in the strong rally off of the October lows, it dropped, which more than wiped out the advantage the system had enjoyed over the index fund through the first five trades of the year.
The system stayed out of the weak high technology sectors as it is designed to do. Telecommunications, which was purchased in early November, shares many characteristics with technology sectors. That fund dominated the rankings in the late summer, and those purchases, which are still open at the end of the year, have been highly profitable. Unfortunately, the track starting at the end of last year managed to avoid buying the fund at that time. The November purchase has fluctuated quite a bit, and as of year end was ahead of the index fund. Although the system did not buy high tech funds in 2002, with the exception of Paper and Forest Products bought in February, the funds shown in the tracks above did not perform well.
Viewing things more generally, it appears that purely mechanical systems such as Selects Switching have great difficulties dealing with today's highly volatile and nervous markets. That seems to be the case for just about all of the mechanical tradings systems, both mine and those developed by others, that I know of are suffering from this problem. To counteract this, I have been using my judgement in conjunction with the system signals when making decisions for my client and personal Select fund trading accounts. If you would like more information about how I am doing so, please get in touch with me.
December 2, 2002: For the most part the market so far has followed my best guess scenario outlined in the previous comments. The strongest sectors in the rally have generally been in the high technology area. That can be seen by the substantial open trade gains in Telecommunications (some are well over 30%), Software, and Networking. The nature of sector trading is that the bulk of the profits come from the relatively large winners rather than a consistent pattern of trades wtih fairly small gains. The problem during the bear market that may or may not have ended in October has been that there have been relatively few good trades.
The challenge is picking those up while reducing the risks inherent in sector fund trading. Given how volatile the markets and sector funds have been, this has been quite difficult to do. Perhaps the best way is have only a relatively small portion of one's investments, say 10% to 20% at most, in sector funds. That exposure combined with a long-term outlook should enable most investors to "sleep at night" with their sector holdings. Long term is in the sense that money in sector funds and stocks in general should not be needed within the next five years. Very aggressive investors could reduce that to three years currently since market levels are well below those at the top, and the most conservative investors may want to keep funds that will be needed in seven or even ten years out of stocks. Since current fixed income rates are quite low, such investors will likely do well if they buy inflation-proctected treasury securities of mutual funds that own such. While the returns won't be spectacular, at least purchasing power will be preserved.
October 21, 2002: The market has rallied strongly in the last eight market days, so the natural question is does that mark the start of a new bull market? I don't claim to have the answer, so what follows is essentially speculation. Since I don't claim any particular ability to predict short-term broad market movements accurately, your guess about what the market will do in the next few months is as good as mine.
My best guess is that we are going to see a few months of good markets followed by new lows early next year. Please note that this speculative opinion has no effect on my systems or how I trade managed accounts. The reason for that forecast is that the November through January period is historically the strongest for stocks. Also, the presidential cycle, which has a wide range of variation, calls for a major market bottom in the mid-term election year followed by strong markets in the pre-presidential election and presidential election years. That raises the question of why I do not think the lows earlier this month will be the bottom of the bear market that started in early 2000.
First, the presidential cycle shows considerable variation from four-year period to four-year period, and having the low early in the year after the mid-term elections would still be consistent with the cycle. The main reason I do not think we have seen the bear market lows is that I do not think we have seen the sort of panic selling and capitulation by most investors that scares them out of the market for several years that is typical of bear market bottoms. A friend says that the purpose of a bear market is to return cash to its rightful owners (as they sell their stocks). The nature of the stock market is to cause high levels of frustration among the majority of investors. That means bear markets scare out a majority who will sell at low prices and not buy back in until they fear missing out on a great bull market. That almost always happens at higher prices than the selling prices and closer to the end of the bull market than its beginning. I don't think we have seen that sort of selling yet. One indicator is the price-earnings ratios are well above the levels that are typical of bear market bottoms. While that measure of stock value has many problems and I am not convinced that the historical standards still apply, the P/E for the S&P 500 is still above the long-term average for that index. Although I doubt that the ratio will fall to the typical bear market low, I expect that it will fall further, which will be caused in a large part by lower stock prices. The next major market decline should lead to panic selling by those investors who are still convinced that things are not bad, and that capitulation will mark the end of the bear market. My guess is that will happen in the first few months of 2003, but keep in mind that is just a guess.
In the mean time, I expect sector rotation to do better than the broad market as it has done so far this year. I think that as we near the end of the bear market in terms of time that the best sectors will now start to show profits. Usually, some sectors start moving up before the broad market makes its bear market lows. That is called leadership by some analysts. The critical question for the Selects Switching System is whether its methods will identify those sectors and move into them in a timely manner that generates healthy profits. The historical record suggests that is likely to be so. However, sector funds hardly existed before 1981 and it was not until 1986 that there were enough for methods like the ones I use to be practical. Since we have to go back to 1973-74 to find a bear market that is at all comparable to the current one, there is no testable historical data that can show how my methods for trading the Fidelity Select funds would have worked hypothetically in previous market conditions similar to the current ones.
August 5, 2002: The market has continued to fall at a fast rate punctuated by sporadic sharp bear market rallies. The rate of decline has accelerated for the most part, and that has had a severe impact on the sector fund trades shown above, which had held up nicely for the most in the first half of the year. Although many of them are doing better than the broad market as measured by the Vanguard Index 500 fund, the losses are significant, so it is scant comfort that there are reasonable alternative investments that have done even worse. Even those trades with single digit declines, such as the Medical Delivery purchases in April, have fallen from healthy profit levels two months ago.
Because the sector rotation methods are based on the relative performance of the mutual funds included in the trading group, a fund such as Medical Delivery can maintain its high relative ranking position although it is falling at a fast rate. That happens because most of the other funds are falling at an even faster rate. However, our objective is certainly not losing less than someone else. We want to make money and, failing that, avoid large losses. Historically, there have usually been enough sectors showing sustained strength in poor markets to acheive those objectives for the most part. After the incredible run up in stock prices, and in the high technology sectors in particular, from 1995 through early 2000, the subsequent decline has been more volatile and more vicious than any seen in the last fifty years. One consequence has been a lack of sustained strength sufficient to produce trading profits over the past two years.
The appropriate defensive mechanism, which I have been advocating for about four years, is the use of stop-loss tactics. That means selling a sector fund when it has lost a certain amount. My research indicates that 7-8% is the appropriate level. However, if one wants to buy sector funds in today's hectic markets, that level may be either too far away or too close. It depends on the individual trader's approach. Because the increased volatility creates more whipsaw opportunities when one can be stopped out only to see the fund recover quickly, a looser stop may be a better idea if one is willing to assume the risk. If so, it is probably a good idea to reduce the amount of one's investments in sector funds for the time being as a counter-balancing risk control measure. An alternative may be using a tight stop based on the thinking that if the trade is not good from the beginning, it is better to be out of it at a small loss.
Another stop tactic is the trailing or retracement stop, which calls for closing a profitable trade once it is dropped by a certain amount from its peak profit level so far. My research indicates that 10% is an appropriate amount. However, some believe that the psychological damage from seeing a winning trade turn into a loser is important to avoid. If so, then a trade that has shown a profit, say of 5% or more, should be closed out if it falls back to near break-even.
Another defensive tactic that I consider worthwhile now is avoiding the high technology sectors, biotechnology, and energy service while the current bear market lasts. Those funds are too volatile and capable of racking up substantial losses in a short period. In better market conditions these funds can produce enormous profits, and they have done so many times in the past. That means it is not a good idea to avoid those funds during better market conditions.
The ultimate defensive tactic is simply to exit the market for the time being and wait for better market conditions. The bear market will end sooner or later. (I suspect sooner, but your guess is as good as mine.) Don't worry about the paltry current returns on money market funds because the purpose of owning them is avoiding trading losses. The "risk" to this approach is missing the beginning (and hopefully not much more) of the next bull market because it is virtually impossible to pick the exact bottom of the bear market. If one tries to do that, most likely one will be sucked into the bear market rallies and pay for it. However, the current risk of trading sector funds, especially the more volatile ones, appears to be greater than profits that will be missed at the start of the next bull market.
June 10, 2002: The trend towards lower stock prices continues. That is not a projection about the future, but an observation about what has been taking place. The sector rotation methods described here are reactive rather than anticipatory, so there is no need to project when the trend will reverse to the upside. That is just as well because in the current volatile market conditions we won't know that the trend has reversed until some time after the fact.
For the most part, the sector trades have performed reasonably well considering the generally falling stock prices we have been seeing. The exceptions have been in the more volatile funds such as Energy Service and the technology sectors. As discussed below, it is probably best to avoid these most volatile sectors until the market is definitely in an uptrend. (I don't know when that will be, but if the presidential cycle is valid this go round, we should see a major bottom some time this year.) Those funds can still make a lot of money as seen by the Feb. 4 purchase of Energy Service, but the risks are large now, which is illustrated by the Energy Service purchases of late April and early May.
May 6, 2002: I'm back! The response to my request at the end of last year for expressions of interest in this page was underwhelming to say the least. (There were a few.) However, I discovered that I found the information more useful than I anticipated, and I missed doing this page. I could have continued to generate the data here without posting, but it helps to have some type of "obligation." I hope I have not caused too much deprivation or inconvenience to the regular readers of this page. There will still be weeks when I do not post due to my travels, and as before, I will try to indicate at the top when that will happen.
The year to date has been a difficult one for the markets in general. Several attempts to rise above the post-attack highs made late last year or early this year have failed. At times, the market has appeared to be ready to test its late September lows, but that has not yet happened. If there is such a test, I expect that the market will not penetrate those lows in any meaningful matter.
With the exception of trades in the high techs (Networking, Wireless), sector rotation using the Selects has done quite well this year. The track for this year illustrates that potential. However, some of the best trades have been in Energy Service, which like the high techs is a quite volatile sector. It is quite likely that anyone using stop-loss methods would have been stopped out of this year's Energy Service trades and not enjoyed the gains (or modest loss on the 12/31/01 purchase) shown above. To some extent this has been true for about two years. To reduce complexity, the tables above do not incorporate the use of stop-loss tactics.
One way to deal with the volatility problem is to avoid buying funds in the most volatile sectors. I would put all of the high techs, Biotechnology, and Energy Service in that category. I have adopted that defensive measure for the time being. Given today's skittish and volatile markets, one is faced with the choice of either being stopped out too often or deciding to ride out the quick, steep drop in one of these funds to wait for the fast, sharp recovery that happens fairly frequently. I do not like deviating from the system by not following all signals. However, in current market conditions, the risk levels are too high for my tastes--and I am fairly risk tolerant--to invest in the most volatile sector funds. I am willing to wait a week or two for a less volatile fund to rise to the top of the rankings. Being in the money market for a few weeks to avoid a volatile sector has been a good idea recently. At some point--I have no idea when--conditions should change, and it should be reasonable to buy the more volatile funds once again. In the past, those funds have generated the most profitable trades, but market conditions have definitely changed from those of the last half of the 1990s.
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