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 1/2/01 Energy Service 4/2/01 Money Market 37.35 34.10 -8.7% -10.5% 1/8/01 Transportation 3/12/01 Energy Service 29.17 28.47 -2.4% -8.8% 1/16/01 Multimedia 3/5/01 Indus. Materials 43.91 41.90 -4.6% -6.3% 1/22/01 Electronics 2/26/01 Natural Gas 68.94 52.64 -23.6% -5.5% 1/29/01 Software 3/5/01 Indus. Materials 60.94 42.06 -31.0% -8.9% 2/5/01 Retailing 3/12/01 Energy Service 47.12 44.97 -4.6% -12.7% 2/12/01 Energy Service 4/2/01 Money Market 40.09 34.10 -14.9% -13.7% 2/20/01 Chemicals 4/23/01 Software 40.50* 40.48 0.0% -4.1% 2/26/01 Natural Gas 4/9/01 Transportation 23.53 23.21 -1.4% -10.1% 3/5/01 Indus. Materials 5/7/01 Software 23.68* 24.38 3.0% 1.9% 3/12/01 Energy Service 4/16/01 Biotechnology 41.13 38.08 -7.4% 0.0% 3/19/01 Const'n & Housing 5/7/01 Software 21.93* 23.42 6.8% 8.0% 3/26/01 Electronics 5/21/01 Networking 50.14 62.13 23.9% 14.1% 4/2/01 Money Market 5/7/01 Software 1.00 1.0046 0.5% 10.4% (interest earned) 4/9/01 Transportation 5/29/01 Biotechnology 27.89* 31.02 11.2% 11.6% 4/16/01 Biotechnology 7/9/01 Home Finance 59.47 64.95 9.2% 1.9% 4/23/01 Software 6/18/01 Medical Delivery 46.56 47.58 2.2% -1.1% 4/30/01 Software 6/18/01 Medical Delivery 48.44 47.58 -1.8% -3.1% 5/7/01 Software 6/18/01 Medical Delivery 48.91 47.58 -2.7% -4.2% 5/14/01 Paper & Forest 6/18/01 Medical Delivery 26.71 26.28 -1.6% -3.1% 5/21/01 Networking 6/25/01 Medical Delivery 4.46 3.35 -24.9% -7.1% 5/29/01 Biotechnology 7/9/01 Home Finance 69.37 64.95 -6.4% -5.3% 6/4/01 Biotechnology 7/9/01 Home Finance 72.26 64.95 -10.1% -5.3% 6/11/01 Medical Delivery 10/29/01 Energy Service 25.46 25.89 1.7% -13.7% 6/18/01 Medical Delivery 10/29/01 Energy Service 25.89 25.89 0.0% -10.4% 6/25/01 Medical Delivery 10/29/01 Energy Service 25.95 25.89 -0.2% -11.2% 7/2/01 Medical Delivery 10/29/01 Energy Service 26.41 25.89 -2.0% -12.5% 7/9/01 Home Finance 8/27/01 Medical Equip&Sys 51.86 50.64 -2.4% -1.5% 7/16/01 Transportation 8/27/01 Medical Equip&Sys 31.21 29.82 -4.5% -1.8% 7/23/01 Automotive 8/27/01 Medical Equip&Sys 23.86 22.81 -4.4% -0.9% 7/30/01 Electronics 9/10/01 Biotechnolgy 52.42 43.19 -17.6% -9.1% 8/6/01 Electronics 9/10/01 Biotechnolgy 55.01 43.19 -21.5% -8.9% 8/13/01 Electronics 9/24/01 Money Market 52.88 35.90 -32.1% -15.7% 8/20/01 Paper & Forest 9/24/01 Money Market 28.20 23.38 -17.1% -14.3% 8/27/01 Medical Equip&Sys 11/12/01 Electronics 15.62 15.39 -1.5% -4.9% 9/4/01 Biotechnology 10/8/01 Defense & Aerosp 62.83 55.49 -11.7% -6.1% 9/10/01 Biotechnology 11/12/01 Electronics 56.22 62.69 11.5% 2.6% 9/17/01 *** No transactions due to markets being closed 9/11 - 9/14 *** 9/24/01 Money Market 11/12/01 Electronics 1.00 1.0070 0.3% 11.6% (interest earned) 10/1/01 Pharmaceuticals 11/12/01 Electronics 9.87 9.62 -2.5% 7.8% 10/8/01 Defense & Aerosp 11/19/01 Networking 40.34 40.46 0.3% 8.5% 10/15/01 Electronics 12/31/01 Energy Service 41.21 49.27 19.6% 5.6% 10/22/01 Software Still held as of 12/31/01 39.44 47.59 20.7% 5.6% 10/29/01 Energy Service 12/17/01 Electronics 28.23 27.08 -4.1% 5.4% 11/5/01 Energy Service 12/17/01 Electronics 25.28 27.08 7.1% 3.0% 11/12/01 Electronics 12/31/01 Energy Service 47.35 49.27 4.1% 2.9% 11/19/01 Networking 1/22/02 Home Finance 3.06 2.87 -6.2% -2.6% 11/26/01 Networking 1/22/02 Home Finance 3.02 2.87 -5.0% -3.1% 12/3/01 Biotechnology 1/7/02 Networking 67.50 61.85 -8.4% 3.2% 12/10/01 Energy Service 1/22/02 Home Finance 26.76 25.70 -4.0% -1.7% 12/17/01 Electronics 1/28/02 Home Finance 51.73 50.20 -3.0% 0.0% 12/24/01 Energy Service 2/11/02 Paper & Forest 29.18 28.45 -2.5% -2.7% 12/31/01 Energy Service 2/11/02 Paper & Forest 29.58 28.45 -3.8% -3.0% Money Market fund assumed to earn interest at a 4.75% annual rate during 4/2 - 5/7/01 Money Market fund assumed to earn interest at a 2.75% annual rate during 9/24 - 11/12/01 To illustrate the use of the table, the "track" starting on 1/2/01, the first Monday and first trading day of 2001 is: Buy Fund Sale/Exchange Percent Index 500 Date Purchased Date Exchange to: Change Change 1/2/01 Energy Service 4/2/01 Money Market -8.7% -10.5% 4/2/01 Money Market 5/7/01 Software 0.5% 10.4% 5/7/01 Software 6/18/01 Medical Delivery -2.7% -4.2% 6/18/01 Medical Delivery 10/29/01 Energy Service 0.0% -10.4% 10/29/01 Energy Service 12/17/01 Electronics -4.1% 5.4% 12/17/01 Electronics Still held as of 12/31/01 -4.8% 1.3% -------------------------------------------------------------------- Total return as of 12/31/01 -18.5% -9.5% accounting for maximum 2% annual management fee -20.5% The calculation for the total return for the track is: (0.913)(1.005)(0.973)(1.000)(0.959)(0.952) - 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 (an amazing trade), and Software in September or again in late November or early December. In 2000, the best trades were in Insurance purchased in late March and Biotechnology bought in the first half of May.
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 most years are less than the 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.
December 31, 2001: Although the Selects Sector Trading System has worked well over a long period of time, it obviously works better in some years than others. Unfortunately, 2001 was one of the others as can be seen from the table above. I don't think any sector fund trading methods based on percent change rankings worked well this year. That was somewhat of a surprise because those methods had worked consistently well since the start of my research database in 1987. However, there have been times in the past when it appeared that ranking methods had stopped working, and then they started to work again.
The only way in which 2001 resembled a typical year for the trading system was in the number of trades. Five were completed, and a sixth was two weeks old at the end of the year. That fits the expected five to seven trades a year. However, with the exception of one in the money market fund, none of them turned a profit, and typically about 2/3 of them do, and the money market really doesn't count. Even the money market trade was not good because the index fund gained over 10% at that time. In a sense, the only good trade of the year was the one in Medical Delivery from June 18 to October 29. While that trade just broke even, the index fund fell by over 10% and was much lower in late September. Medical Delivery is a defensive sector that is not very sensitive to the economy, and it served that function well this year. However, the other three completed sector fund trades were losers, so the year as a whole was the worst ever for the trading system as shown in the tables.
My best wishes for a happy, prosperous, and satisfying 2002.
September 24, 2001: The terrible events of September 11 and their affects on the financial markets (closed for the balance of the week and then sharply lower when they re-opened on September 17) are the type of event that can't be factored into any trading systems. Those systems that owned equities then were severely impacted regardless of the type of defensive measures, such as stop-losses, that may have been in use. Those systems that were out of the market or short equities (due to the general trend down since mid-May) will look very good. In evaluating trading systems and methods, it is important not to give too much weight to external events that have a dramatic impact on stock prices unless it is reasonable to expect that those types of events may not be quite rare in the future. We all hope that is the case with terrorist attacks like the ones on September 11. Otherwise, we may well face much larger problems than trying to avoid losses in the stock market.
The tracks shown above held up better than most market sectors although they showed a substantial loss in the past week. That was because the fund they hold, Medical Delivery, has "defensive" characteristics that insulate it somewhat from economic events and cycles. After all, people are still going to get sick and injured and need medical care. The system has been holding Medical Delivery for two to three months in part because the overall market has been weak, which makes defensive sectors more attractive.
Because the markets were only open one day of the week of September 10-14 and because the rankings that drive the system are done using Friday-to-Friday data, they best way to handle things was simply to act as if that week with its one trading day did not exist. That meant there were no transactions signaled for Monday, September 17 since such action would have required data for September 14 or the last trading day of that week. If any of you use software or spreadsheets to perform rankings based on week-to-week changes and want to ignore that week as I do, you need to make sure that those rankings are determined by counting back the appropriate number of data points rather than using dates to determine which two prices to compare.
See the commentary for April 2 below for information about how the system treats the money market fund.
August 20, 2001:
This commentary takes two perspectives: short-term and long-term.
Short-term: Over the past two months or so the overall market has remained quite unsettled and lacking in direction or leadership due to worries about an impending recession and uncertainty about when the economy will begin to improve. This is reflected in the sector rotation strategy illustrated above. There is both good news and bad news over the past couple of months. The Medical Delivery purchases in June and early July are profitable in the 5-8% range as of this date while the index fund is showing losses of 3-6% for the same periods. However, the more recent signals, particularly those in Electronics have fallen by more than the broad market. Once again, the turbulent action in the technology sectors has confounded the trading system on a hypothetical basis. Fortunately, the illustrative tracks (and actual managed client and personal accounts) have avoided these funds recently and hold primarily Medical Delivery.
Long-term: Looking at the annualized returns of the tracks shown above that start near the beginning of each year from 1996-2000 shows a remarkable consistency. Those returns range from 14.3% to 17.6% before management fees or about 12.3% to 15.6% after management fees. Although these returns result from signals generated in "real-time," they must be considered hypothetical and subject to the usual cautions about the interpretation of such types of returns. In contrast, the index fund returns over the same periods have shown a much wider range, from losses at an 11.4% annual rate to gains at a 13.6% rate. The track starting at the beginning of this year can't be considered as long-term yet. However, while it is down so far, the drop is less than that of the index fund.
Trading sector funds is often a somewhat rocky ride. Consequently it is quite interesting to see the consistent long-term returns over a wide range of market conditions for the tracks shown above. Tracks starting at different times will have different rates of return than the ones shown, so generalizing from the examples above may not be warranted. I have said for quite some time that sector rotation has the capability of making money in both good and bad markets, although it is certainly easier to make money in good markets. I believe the examples shown above, which are selected by the calendar rather than "cherry picked," show the value of following sector rotation on a long-term basis not getting too excited about the week-to-week, month-to-month, quarter-to-quarter, or even year-to-year fluctuations.
June 18, 2001: Two funds are signaled for sale this week: Paper & Forest and Software. An investor holding both of these and wanting to maintain diversification would most likely exchange one of these funds into Medical Delivery, the top-ranked fund for this week, and the other into the money market fund. In some weeks, it might make sense to exchange into the second-ranked fund instead of the money market, but this week Health ranks second, and it is obviously correlated with Medical Delivery and would not provide real diversification. The money market fund does not have a short-term selling charge, so the most likely action is to move from that fund into the next top-ranked fund that is not in the health care sector.
Given the market's continuing turbulent action without strong trends, having part of one's investment in the money market fund is not hard to take. The Software trade that ended this week looked like it had the potential to produce some nice gains. However, once again a trend up reversed fairly sharply and wiped out most or all of the gains that been seen in the past weeks.
April 2, 2001: For the first time since September 1998 the system has ranked the money market at the top, which means that all the other Select funds have fallen during the period used to determine the rankings. Also, Energy Service's sharp drop in the last week resulted in that fund being sold and exchanged into the money market fund. There are several things worth noting:
a) The sector rotation methods discussed here are often called market timing, but the normal meaning of that term is quite different. Classic market timing means attempting to exit the market to the safety of the money market fund one overall market conditions are not favorable. Given how poorly the market has done over the past year, that type of market timing should have moved to the money market fund much earlier than this week. Sector rotation may move into the money market fund, but as we see, it will not do so until all sectors are performing poorly.
b) Although there is no short-term selling penalty (0.75% within 30 days for the other Select funds) for the money market fund, the system will hold that fund for the five week minimum period. In effect, the system treats the money market like any other sector and will hold as long as it is showing strength according to the rankings. Strength for the money market fund really means that the other sectors are very weak rather than the money market is showing exceptional gains.
c) The sharp drop in Energy Service and the high technology sectors in the past week illustrates once again the need for a "stop-loss" tactic. To reduce the complexity shown on this page, such tactics are not incorporated into the tables shown above. However, they are highly recommended to anyone trading sector funds in today's extremely volatile markets.
d) The fall in Energy Service last week turned what had been a profitable trade into one that lost about the same as the broader market. However, the tracks shown above are still doing better than the index fund over the periods compared.
e) Because of the five week minimum holding period and not using stop-losses in the table above, Energy Service purchased on March 12 is not exchanged into the money market fund this week like the purchases made in December, January, and February. The sharp drop so far in the March 12 purchase, about 17%, illustrates the need for a stop-loss tactic. My recommended level is in the 7-8% range.
March 19, 2001: As has been widely publicized, 2001 has not been kind to stocks. Except for the first one, all of the purchases so far this year are down. However, with the exception of the two high technology funds bought in the last two weeks of January and the one-week old trade in Energy Service, these losses have have been less than the index fund. That shows that the relative strength approach to sector fund investing has its merits even in falling markets. There are going to be some losing trades, which is true for virtually any method of investing or trading, but as long as they are not too large the winning trades will more than make up for the losers and should provide healthy profits over the longer term. The tracks shown starting near the beginning of the past few years illustrate how the sector trading works to perform better than the index fund over the course of several to many trades.
The severe losses in Electronics and Software purchased in late January show why some type of "stop-loss" mechanism is needed, particularly with the more volatile sector funds. To keep the tables from becoming more complicated, no stops are used, but this topic with an illustrative example is discussed elsewhere on this site. Fortunately, the tracks shown would have held Energy Service and not bought into the high techs as a result of the technology rally in January. However, some other tracks or a new track would have owned those funds. A stop-loss, even a fairly loose one, would have saved a lot of heart and stomach aches for anyone who owned those funds.
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