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 (eliminated in September 2003) and Fidelity's small transaction fees (waived if a Fidelity-employed human is not involved in the order placement) 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 1/5/04 Telecomm 3/8/04 Biotechnology 33.20 36.11 8.8% 2.5% 1/12/04 Developing Comm. 3/15/04 Const & Housing 19.55 18.24 -6.7% -1.7% 1/20/04 Developing Comm. 3/15/04 Const & Housing 20.29 18.24 -10.1% -2.7% 1/26/04 Developing Comm. 3/15/04 Const & Housing 19.88 18.24 -8.2% -4.1% 2/2/04 Medical Delivery 3/15/04 Const & Housing 32.34 32.08 -0.8% -2.5% 2/9/04 Home Finance 3/29/04 Money Market 68.32 67.85 -0.7% -1.3% 2/17/04 Wireless 4/19/04 Natural Gas 4.95 4.90 -1.0% -1.6% 2/23/04 Industrial Mat. 4/12/04 Electronics 35.51 34.61 -0.4% 0.6% 3/1/04 Natural Gas 5/17/04 Money Market 23.52 23.14 -1.6% -5.9% 3/8/04 Biotechnology 6/14/04 Developing Comm. 57.69 55.38 -4.0% -1.5% 3/15/04 Const & Housing 4/26/04 Natural Gas 36.25 36.08 -0.5% 2.9% 3/22/04 Biotechnology 6/14/04 Developing Comm. 54.41 55.38 1.8% 3.1% 3/29/04 Money Market 5/10/04 Utilities 1.00 1.00 0.09% -3.2% (Interest earned) 4/5/04 Electronics 5/10/04 Utilities 44.94 38.88 -13.5% -5.6% 4/12/04 Electronics 5/17/04 Money Market 44.57 37.86 -15.1% -5.2% 4/19/04 Natural Gas 5/24/04 Wireless 24.26 23.32 -3.9% -3.4% 4/26/04 Natural Gas 6/7/04 Developing Comm. 24.19 23.46 -3.0% 0.7% 5/3/04 Natural Gas 6/7/04 Developing Comm. 24.30 23.46 -3.5% 2.3% 5/10/04 Utilities 6/21/04 Energy Service 32.76 33.99 3.8% 4.2% 5/17/04 Money Market 6/21/04 Energy Service 1.00 1.00 0.07% 4.4% (Interest earned) 5/24/04 Wireless 6/28/04 Energy Service 4.77 4.99 4.6% 3.6% 6/1/04 Industrial Mat. 7/26/04 Energy 32.47 32.38 -0.3% -3.1% 6/7/04 Developing Comm. 7/12/04 Natural Gas 17.73 16.60 -6.4% -2.2% 6/14/04 Developing Comm. 7/19/04 Energy Service 16.77 16.09 -4.1% -2.1% 6/21/04 Energy Service 11/1/04 Developing Comm. 35.27 39.89 13.1% 0.6% 6/28/04 Energy Service 11/1/04 Developing Comm. 35.28 39.89 13.1% 0.3% 7/6/04 Energy Service 11/1/04 Developing Comm. 36.35 39.89 9.7% 1.8% 7/12/04 Natural Gas 8/23/04 Brokerage 25.38 24.51 -3.4% -1.5% 7/19/04 Energy Service 11/1/04 Developing Comm. 37.97 39.89 5.1% 3.2% 7/26/04 Energy 8/30/04 Biotechnology 28.29 27.99 -1.1% 1.4% 8/2/04 Energy Service 11/1/04 Developing Comm. 37.40 39.89 6.7% 2.6% 8/9/04 Money Market 9/13/04 Energy Service 1.00 1.00 0.10% 5.9% (Interest earned) 8/16/04 Utilities Growth 10/4/04 Natural Gas 34.84 37.33 7.1% 5.4% 8/23/04 Brokerage 10/4/04 Natural Gas 46.75 48.61 4.0% 3.8% 8/30/04 Biotechnology 10/11/04 Natural Gas 52.11 53.82 3.3% 2.5% 9/7/04 Biotechnology 10/11/04 Natural Gas 53.32 53.82 0.9% 0.4% 9/13/04 Energy Service 11/1/04 Developing Comm. 38.61 39.89 3.3% 0.6% 9/20/04 Energy Service 11/1/04 Developing Comm. 39.23 39.89 1.7% 0.9% 9/27/04 Electronics 11/15/04 Medical Delivery 32.26 37.08 14.9% 7.5% 10/4/04 Natural Gas 11/8/04 Medical Delivery 28.64 27.93 -2.5% 2.8% 10/11/04 Natural Gas 11/15/04 Medical Delivery 28.69 28.36 -1.2% 5.5% 10/18/04 Wireless 12/6/04 Medical Delivery 5.41 5.89 8.9% 7.1% 10/25/04 Transportation 12/6/04 Medical Delivery 38.29* 42.12 10.0% 9.0% 11/1/04 Developing Comm. 12/27/04 Const & Housing 17.47 19.14 9.6% 6.9% 11/8/04 Medical Delivery 3/7/05 Energy 37.89 48.07 26.9% 5.8% 11/15/04 Medical Delivery 3/7/05 Energy 39.89 48.07 20.5% 4.1% 11/22/04 Medical Delivery 3/7/05 Energy 40.02 48.07 20.1% 4.6% 11/29/04 Energy Service 1/3/05 Automotive 43.22 41.01 -5.1% 2.1% 12/6/04 Medical Delivery 3/7/05 Energy 42.07 48.07 14.3% 3.4% 12/13/04 Medical Delivery 3/7/05 Energy 44.45 48.07 8.1% 2.6% 12/20/04 Medical Delivery 3/7/05 Energy 44.19 48.07 8.8% 2.9% 12/27/04 Const & Housing 3/14/05 Chemicals 42.62 44.56 4.6% 0.5% Money Market fund assumed to earn interest at a 0.75% annual rate for 3/29 and 5/10 purchases and at a 1.00% rate for 8/9 purchase. Starting on 1/5/04, the closest Monday to the start of 2004, if one had invested into a single Select fund and followed the system, these would be the trades: Buy Fund Sale/Exchange Percent Index 500 Date Purchased Date Exchange to: Change Change 1/5/04 Telecomm 3/8/04 Biotechnology 8.8% 2.5% 3/8/04 Biotechnology 6/14/04 Developing Comm. -4.0% -1.5% 6/14/04 Developing Comm. 7/19/04 Energy Service -4.1% -2.1% 7/19/04 Energy Service 11/1/04 Developing Comm. 5.1% 3.2% 11/1/04 Developing Comm. 12/27/04 Const & Housing 9.6% 6.9% 12/27/04 Const & Housing Still held as of 1/3/05 1.2% -0.2% -------------------------------------------------------------------- Total return as of 1/3/05 16.7% 8.8% accounting for maximum 2% annual management fee 14.7% The calculation for the total return for the track is: (1.088)(0.960)(0.959)(1.051)(1.096)(1.012) - 1 expressed as a percent.Here is a table showing what have happened if one had followed the method illustrated above starting on the closest Monday to the beginning of each year since 1996. The returns shown are those for the following year (52 weeks). "Selects System" shows the results of trading the Select funds, which have been reduced by the maximum 2% annual management fee. Those returns do not reflect Fidelity's load (removed in September 2003) applied to initial purchases of Select funds, which ranged from 0% to 3% depending on the amount of the purchase. The links in the right column show the weekly trades for each year and the computations of the values in the table. Returns for the Vanguard Index 500 fund are included to provide a market condition context.
Year Selects System Index 500 Weekly Trade Lists & Computations 1996 31.2% 21.9% 1996 Weekly Trade List 1997 33.1% 28.6% 1997 Weekly Trade List 1998 17.1% 27.7% 1998 Weekly Trade List 1999 56.4% 19.6% 1999 Weekly Trade List 2000 32.0% -10.8% 2000 Weekly Trade List 2001 -20.5% - 9.5% 2001 Weekly Trade List 2002 -23.8% -21.3% 2002 Weekly Trade List 2003 18.4% 28.2% 2003 Weekly Trade List 2004 14.7% 8.8% ------ ------ Average(96-04) 17.6% 10.3%
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, 2005:
Now that the year (the 52 weeks from 1/5/04 to 1/3/05 for our evaluation purposes) is over, we can take a look to see how the Selects system did. The track that started last January 5 did much better than the index 500 fund, which I use as a measure of how the broad market is doing. There were five completed trades plus the first week of a sixth trade. That fits nicely with the expected five to seven trades a year. Years with fewer trades are usually better ones because the system tends to hold onto sector funds that are showing the most strength. Three of the five completed trades were profitable, which is consistent with the expectation that about two-thirds of trades will be winners. As is typical, the winning trades did better than the index fund over the period of the trade. While we hope the losing trades won't perform worse than the broad market, it is not uncommon to see them do worse. That was the case, albeit by fairly small amounts, in 2004. In total, 2004 was a very good year for sector fund investing and the Selects Switching system illustrated above.
I will continue to show the track above until Contruction and Housing is finally sold. Starting next week, we also show the new 2005 track that assumes Automotive was bought at Monday's closing price.
2004 ended up with a good rally in stock prices, and that resulted in broad market gains in line with the long-term historical averages. The year started out with the last move up of the strong period for stocks that began in March 2003, but things fizzled quickly. For most of the year, the market averages moved in a sideways pattern that had a mild bias towards the down side. The last quarter saw the bull again on the loose. Since 2005 is the first year of a presidential term, history indicates that it will not be a particularly good year for stocks. If that is the case, sector fund investing may well become quite dicey so all but the most aggressive investors in sector funds should be prepared to employ defensive measures such as stop loss tactics.
The above is not a prediction. I don't make them. I'll use my thoroughly tested formulas for making investment decisions. Any opinion I may have about what the market is likely to do in the future is irrelevant.
November 15, 2004:
The signals this week show how two "tracks" (the example above shows the track starting 1/5/04, which is not affected by this week's signals) can merge because two funds, Electronics and Natural Gas, are to be sold. If the proceeds from both sales are used to buy the top-ranked fund, Medical Delivery, then there will be a merger of tracks. An investor who owned both Electronics and Natural Gas might not want to lose diversification by putting the combined assets into just one Select fund. There are at least two ways to avoid that. One, which I often use when managing accounts, is to buy the second ranked fund if it is not correlated with the top-ranked one. For example, I would not buy both Medical Delivery and Health Care. Another method is to keep the proceeds from one of the sales in Select Money Market (or another Fidelity money market fund) until a Select fund not correlated with Medical Delivery rises to the top of the rankings. There is no short-term selling charge for selling Select Money Market, so we do not have to worry about whether it will be held for 30 days.
At this time of year, another factor may come into play for those trading in taxable accounts. Fidelity makes distributions on Select funds the first three Fridays in December. The Fidelity web site may have estimates of the amounts and nature (long-term capital gains, short-term, dividends) of the distributions. Most of what you will see and hear says that year-end distributions should be avoided due to tax consequences. However, for some investors, substantial year-end distributions, particularly if they are long-term capital gains, can provide tax advantages. Due to the complexity of the tax code (no shock here), it is impossible to determine guidelines that apply to all investors, and each much do his or her own evaluation. Please e-mail me if you want to know more about this topic, but keep in mind that I am not an accountant and I make no claim of expertise in tax matters.
November 1, 2004:
The long run in Energy Service, which saw the first trades last more than four months, has finally ended as crude oil prices dropped to around $50 per barrel. The earlier trades were quite profitable, and all of the Energy Service purchases from June through September did better than the broad market as represented by the index fund. If oil prices resume their increase, I would not be surprised to see Energy Service back on top of the rankings in the near future.
With the long trade in the track shown above completed this week, there have now been four complete trades in 2004. Typically there are five to seven in a year, so this year will be on the low end of that range. If Developing Communications does well, then we may not see five complete round-trips this year.
While the market has not exceeded the highs seen earlier this year, it has been trending higher since making the August lows. With the apparent re-election of the President (I am writing this on the morning of 11/3), a major uncertainty has been essentially removed. I would not be surprised to see the market perform well through the end of the year in reaction to the election results. Also, the November through January period is historically the strongest one for stocks. If I had to guess, and I don't use any of my predictions--only well researched formulas--to manage client accounts, I would say that the markets will end the year at or near their highs for the year. The first year of presidential terms on the average is not a good one for stocks, so any rally may not last very long. Time will tell as it always does.
July 26, 2004:
The market has continued in a down trend. This can be seen by its making new intermediate lows and failing to exceed the highs made in the first quarter of the year. Until those highs are surpassed, it is best to adopt defensive tactics. Accordingly, client accounts are only half invested, and may be moved entirely out of the market in the near future.
The last six weeks' top ranked funds have all been in the energy sector reflecting higher oil prices and generally weak performance by stocks in the other sectors. Except for last week's Energy Service purchase, all have done better than the broad market so far. However, only the first two are showing a profit now. Losing less than the market can provide a bit of comfort, but it does not increase one's wealth. Since energy can be somewhat volatile, buying in after a nice run up (+7.6% from June 21 to July 19 in Energy Service) can result in losses, which hopefully are only short-lived pullbacks in a longer uptrend. That is what has happened so far in the hypothetical track shown above starting at the beginning of the year.
Author and member of the Wall Street Week Hall of Fame Martin Zweig once said that the market will do what it can to make most participants wrong. I don't know if that is true, but I think it will almost certainly act in a way that produces frustration for a significant majority of investors. That seems to be happening now. There is no magic solution. The best course is sticking with one's carefully formulated investment plan. All investors are going to be "wrong" (i.e. have periods when they are losing money) some of the time. It is important to realize this and not sell out in a panic. Usually when that happens the eventual bottom is close at hand.
May 17, 2004:
In the three months since the last comments, the market topped out and has started on what appears to be at least an intermediate term (several months) trend to the downside. Consequnetly, the models I use to position portfolios have all given sell signals. None of them is close to a buy signal, but these models are designed to identify important trends rather than get in and out at the market extremes. Since the presidential election year is historically a good one for stocks, stocks may well bottom in the next couple of months and then gain ground and finish up for the year. That is not a prediction, but it is more likely if Bush looks like he will win a second term. Rather than try to read tea leaves and predict the direction of the mnarket, I rely on well researched and tested models to identify the trends and take appropriate positions. In a secular bear market as described in the previous commentary, it is especially important to pay attention to the sell signals, which say when the risks are the highest. Today's low money market returns may be somewhat painful, but they are much better than being in falling markets for stocks (or even bonds when interest rates are rising).
February 17, 2004:
The year 2004 has started off by continuing the fairly steady uptrend that began about eleven months ago. There have been a couple of essentially sideways movement periods along the way, and that may the best description of the market over the past month or so. However, there has not yet been anything like a "typical" pullback in a bull market. For example, the S&P 500% has not fallen by as much as 5% since the climb in mid-March of last year began.
Taking a longer view, I think the odds are quite good that a long-term (sometimes called secular) bear market began in early 2000. Historically, that means a period when stocks suffer sharp drawdowns, such as the drop of over 45% in the S&P from its peak in March 2000 to the bottom in October 2002, take several years to get back close to the prior peaks and any new peaks are few, spaced out, and not much above the previous one. If we are in that type of market, it could well be another 12-15 years before the S&P moves significantly higher than it was in 2000.
That doesn't mean one should avoid stocks for the entire period. There will certainly be shorter-term, sometimes called cyclical, moves up during the secular bear market. We are seeing one now, which began last March. It nicely fits the historical presidential cycle pattern in which the two years following a presidential election on the average are much worse for stocks the year before the election year and the election year itself. Moreover, the year before the election--last year in the current cycle--is the strongest on the average. 2003 certainly fit.
My research shows that to avoid painful and prolong losses in stocks during a secular bear market, some type of model that says when to be in stocks and when not to be in them is vital. In a secular bull market, such models are not really needed because just holding on recovers from the generally shallow drawdown periods relatively quickly. In a long-term bear market, such is hardly the case. Most investors reach a point when they can't stand the "pain" any longer and bail out of stocks. But doing that destroys their investment plans and may well keep them from achieving their financial goals. A decent model--it need not be close to perfect and probably won't be--combined with an appropriate allocation among investment classes will enable most investors to keep the drawdowns to acceptable levels. That in turn, will result in sticking to their investment plans and greatly increase the chances of achieving financial objectives. Please get in touch with me if you would like more information about how tactical asset allocation can be used to manage invesmtent portfolios in order to greatly reduce risks in all markets, but especially in long-term bear markets. In addition to risk reduction, returns in years when stocks do not do well likely will be better than "buy and hold" will produce.
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