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 12/30/02 Indus. Materials 2/24/03 Energy Service 24.06 23.66 -1.7% -5.1% 1/6/03 Defense & Aerosp 2/24/03 Energy Service 41.28 36.38 -11.9% -10.2% 1/13/03 Networking 3/10/03 Energy Service 1.70 1.46 -14.1% -12.6% 1/21/03 Multimedia 2/24/03 Energy Service 36.04 31.63 -12.2% -6.0% 1/27/03 Money Market 3/24/03 Electronics 1.00 1.002 0.2% 2.3% (interest earned) 2/3/03 Medical Delivery 3/17/03 Electronics 23.64 22.80 -3.6% 0.6% 2/10/03 Natural Gas 3/24/03 Electronics 17.01 16.60 -2.3% 3.6% 2/18/03 Energy 4/7/03 Brokerage 20.06* 20.23 0.8% 3.6% 2/24/03 Energy Service 4/7/03 Brokerage 30.56 28.14 -7.9% 5.9% 3/3/03 Electronics 4/28/03 Air Trans. 24.26 27.29 12.5% 9.9% 3/10/03 Energy Service 4/21/03 Transportation 28.86 29.25 1.4% 10.7% 3/17/03 Electronics 4/28/03 Air Trans. 26.49 27.29 3.0% 6.2% 3/24/03 Electronics 4/28/03 Air Trans. 26.11 27.29 4.5% 6.0% 3/31/03 Chemicals 5/5/03 Air Trans. 38.39* 41.32 7.6% 9.4% 4/7/03 Brokerage 5/19/03 Networking 35.49 37.98 7.0% 4.9% 4/14/03 Energy Service 6/9/03 Brokerage 28.81 32.95 14.4% 10.5% 4/21/03 Transportation 5/27/03 Energy Service 25.23 27.59 15.0% 6.8% 4/28/03 Air Trans. 8/4/03 Indus. Materials 22.64 26.44 16.8% 7.9% 5/5/03 Air Trans. 8/4/03 Indus. Materials 24.06 26.44 9.9% 6.5% 5/12/03 Networking 7/28/03 Chemicals 1.80 2.04 13.3% 5.8% 5/19/03 Networking 7/28/03 Chemicals 1.76 2.04 15.9% 8.5% 5/27/03 Energy Service 6/30/03 Air Trans. 33.88 31.17 -8.0% 2.6% 6/2/03 Biotechnology 7/28/03 Chemicals 47.39 51.92 9.6% 3.3% 6/9/03 Brokerage 8/4/03 Indus. Materials 42.70 45.62 6.8% 0.9% 6/16/03 Brokerage 8/4/03 Indus. Materials 44.79 45.62 1.9% -2.6% 6/23/03 Air Trans. 8/4/03 Indus. Materials 26.03 26.44 1.6% 0.3% 6/30/03 Air Trans. 8/4/03 Indus. Materials 27.14 26.44 -2.6% 1.0% 7/7/03 Wireless 8/18/03 Natural Gas 3.32 3.40 2.4% -0.3% 7/14/03 Computers 8/18/03 Natural Gas 31.15 30.78 -1.2% -0.2% 7/21/03 Biotechnology 8/25/03 Electronics 50.31 49.61 -1.4% 1.7% 7/28/03 Chemicals 9/2/03 Electronics 43.74 44.16 1.0% 2.8% 8/4/03 Indus. Materials 10/6/03 Constr & Housing 26.87 29.70 10.5% 5.5% 8/11/03 Indus. Materials 10/6/03 Constr & Housing 27.36 29.70 8.6% 5.7% 8/18/03 Natural Gas 9/29/03 Indus. Materials 18.79 18.62 -0.9% 0.8% 8/25/03 Electronics 10/20/03 Developing Comm. 36.24 39.63 9.4% 5.4% 9/2/03 Electronics 10/20/03 Developing Comm. 37.95 39.63 4.4% 2.4% 9/8/03 Networking 10/27/03 Constr & Housing 2.43 2.29 -5.8% 0.1% 9/15/03 Pharmaceuticals 10/20/03 Developing Comm. 8.51 8.40 -1.3% 3.1% 9/22/03 Pharmaceuticals 10/27/03 Constr & Housing 8.54 8.27 -3.2% 0.9% 9/29/03 Indus. Materials 1/20/04 Developing Comm. 28.99* 35.49 22.4% 13.7% 10/6/03 Constr & Housing 12/15/03 Energy Service 31.41 33.74 7.4% 3.6% 10/13/03 Constr & Housing 12/15/03 Energy Service 32.30 33.74 4.5% 2.5% 10/20/03 Developing Comm. 12/8/03 Medical Delivery 16.20 16.17 -0.2% 2.6% 10/27/03 Constr & Housing 12/15/03 Energy Service 32.60 33.74 3.5% 3.9% 11/3/03 Defense & Aerosp 12/29/03 Energy 50.54 54.96 8.7% 5.1% 11/10/03 Electronics 12/15/03 Energy Service 41.48 39.94 -3.7% 2.2% 11/17/03 Electronics 12/22/03 Energy Service 40.28 40.60 0.8% 4.9% 11/24/03 Medical Delivery 1/12/04 Developing Comm. 29.07 30.63 5.4% 7.4% 12/1/03 Medical Delivery 1/12/04 Developing Comm. 30.58 30.63 0.2% 5.5% 12/8/03 Medical Delivery 1/12/04 Developing Comm. 30.59 30.63 0.1% 5.6% 12/15/03 Energy Service 2/9/04 Home Finance 30.50 34.19 12.1% 6.9% 12/22/03 Energy Service 2/9/04 Home Finance 31.85 34.19 7.3% 4.5% 12/29/03 Energy 2/9/04 Home Finance 25.14 25.46 1.3% 2.9% Money Market fund assumed to earn interest at a 1.00% annual rate. Starting on 12/30/02, the closest Monday to the start of 2003, 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 12/30/02 Indus. Materials 2/24/03 Energy Service -1.7% -5.1% 2/24/03 Energy Service 4/7/03 Brokerage -7.9% 5.9% 4/7/03 Brokerage 5/19/03 Networking 7.0% 4.9% 5/19/03 Networking 7/28/03 Chemicals 15.9% 8.5% 7/28/03 Chemicals 9/2/03 Electronics 1.0% 2.8% 9/2/03 Electronics 10/20/03 Developing Comm. 4.4% 2.4% 10/20/03 Developing Comm. 12/8/03 Medical Delivery -0.2% 2.6% 12/8/03 Medical Delivery Still held as of 12/29/03 1.8% 3.9% -------------------------------------------------------------------- Total return as of 12/29/03 20.4% 28.2% accounting for maximum 2% annual management fee 18.4% The calculation for the total return for the track is: (0.983)(0.921)(1.070)(1.159)(1.010)(1.044)(0.998)(1.018) - 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% ------ ------ Average(96-03) 18.0% 10.5%
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 29, 2003:
The "year" 2003 (actually the 52 weeks from 12/30/02 to 12/29/03) is now complete, so we can take a look about how the method did. The track starting on 12/30/02 showed a bit more activity than the historical average of 5-7 trades per year. There were seven completed trades, and one still open at the end of the year. Four of the seven completed trades and the open one were profitable, which is consistent with the historical average of about 2/3 winners. Two of the losers were quite small, but one, the Energy Service trade starting in February, showed a large loss while the broad market was advancing. That very poor trade resulted the in the system trailing the index fund for the year. However, system profits were still quite good for the year.
Since the sustained bull market ended in early 2000, trading sector funds has become harder. That is not surprising because sector funds are going to be more volatile than the market as a whole. If the market is experiencing periods when upward movement is not the norm, then many, if not most, sectors are going to be going down to an even greater extent. The current "secular bear market" has seen quite sharp reversals of uptrends, which means getting out of a sector fund that has reversed even a week too late can be quite costly. One consequence of the current environment is that I now use my judgment to determine when to be fully invested in sector funds and when to be partially or fully out of the market. That is not shown above, but you can contact me for more information.
Because the closest market Monday to the start of 2004 is January 4, the track for 2004 will start next week.
September 2, 2003:
Just about all indices, including the Dow, Nasdaq, and Russell 2000 small cap, have moved well above their highs earlier this summer. That indicates a resumption of what I have described as a cyclical (although the description is irrelevant) bull market consistent with the presidential cycle. Managed accounts in the Selects Switching program had been partially in cash since early August awaiting a breakout in one direction or another from the sideways pattern described in the July 21 note. That breakout was to the upside, and the timing models I pay the most attention to have now given buy signals. Accordingly, accounts that trade Select funds have been moved back to a fully invested position.
July 21, 2003:
After moving out of the channel described in the previous comment, the major indices continued to rise until mid-June. They have moved sideways for the most part since then. This can be interepreted as either a healthy consolidation before continued movement to the upside or topping action that will eventually see lower lows than last October's. I think we are in a cyclical bull market consistent with the presidential election cycle. If so, stock prices should be higher by the end of the year. Most of the open sector trades shown above are doing well, and they are not concentrated in a single area such as high technology or energy. That is typical of the early phases of a bull market. The advances in those stages tend to be widespread rather than concentrated. Of course, I may be too optimistic, and I try not to let my opinion affect my trading. I want to let the market tell me what it is most likely to do (that is, what is the current trend) and act accordingly.
May 19, 2003:
The market is still in the channel described in the April 7 comments. It has moved very close to the top of that range. I see two possibilities as being most likely. One is that once again the market will retreat from the upper channel boundary as it has done a couple of times already. Given the width of the "trading range" (775 is about 20% below 965 -- S&P 500 values), the retreat could be quite painful to those with long equity positions. I have been reducing the exposure of client accounts in the past couple of weeks. The other likely possibility is that the market will significantly break out of the channel on the upside. I would think that would mean the three-year old bear market is over and we are in a bull market consistent with the presidential cycle. If so, by reducing exposure, one will miss some opportunities to profit during the break out to the upside. However, there should be ample opportunities to move back in and profit from a new bull market.
I have no forecast about which of these two possibilities is the most likely. However, since it is not year clear that the bear is back in its cave, I think the more prudent course is to take some of the profits gained over the past couple of months as the trading system signals selling funds that are owned and moving to the money market fund to await further developements. If the market remains in the channel, this will prove to be the better thing to do. If the market breaks out, then it will be time to adopt bull market tactics. There are always tradeoffs in investment decisions, and one can't expect to be right all or nearly all of the time.
April 7, 2003:
Now that the Iraq situation is much clearer than a month ago, the market is more likely to be concerned with the forthcoming round of first quarter earnings reports and the outlook for the economy later this year. Taking a longer view at what the market has been doing, it is fair to say that it has been in a sideways channel for about nine months. The movements within the channel and the day-to-day fluctuations have been quite volatile some of the time. Given that news from Iraq and elsewhere still can have a dramatic effect, I expect this behavior to continue.
More importantly, the direction of the breakout of from the channel--the S&P 500 moving significantly above 965 or below 775--is quite likely to continue meaningfully both in its duration and the size of the move. That is because of the length of time the channel has held. The longer the channel, the greater the chance that a move out of it will be a major one. If that move is to the upside, I think it will be the start of a new bull market and the October low will mark the bottom of the bear market that began in early 2000. On the other hand, if the breakout is to the down side, then the bear is quite likely to be on the prowl for quite a bit longer and do a lot more damage to stock prices. I have no prediction about the direction of the breakout.
Technology has been one of the better performing areas so far this year, particularly since the energy sectors have pulled back based on the progress of the Iraq campaign. However, other sectors have also shown a lot of strength. That likely means that if the next sustained move is up, we have not yet established which sectors will lead the move. The high technology sectors, which have been strong relative to the broad market since the October lows, are a good posibility, but their leadership has not yet been clearly established yet. If we are going to enter a bull market, I expect that the sector funds that are top-ranked will be among the strongest performers, and they have the potential to generate some very nice profits. On the other hand, if the markets weaken and move below the channel, these funds may well be among the most vulnerable. In such cases, one needs to be ready to be get out fairly quickly. Adhering to stop loss levels is one good way to do that.
March 3, 2003:
Given that we are still in the bear market that started in early 2000 and that there is great uncertainty about what will happen in Iraq and the aftermath, it is not surprising that the markets in general and the sector fund trading system have started out the year on a definite down note. About the only sectors showing any strength have been in the energy area and high technology, which seems to be rebounding a bit after the enormous drop from the 2000 high levels. However, this strength so far has not been sustained and has been marked by sharp pullbacks. For example, Energy Service purchased on 2/24 fell 3.8% in the first week. I suspect that this type of behavior will continue until the foreign policy issues, which also include North Korea, have been essentially resolved. Accordingly, following the system now is quite risky, particularly because the most recent top-ranked funds are amongst the most volatile sector funds. Client accounts are currently totally in money market, and I expect that they will remain there unless we get a very clear indication that the bear is no longer on the prowl.
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. To counteract this, I have been using my judgment 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.
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