2005 Weekly Trades

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

1/3/05    Automotive        2/14/05  Electronics       34.40  34.08  -0.9%    0.5%
1/10/05   Telecomm          2/14/05  Electronics       36.81  35.20  -4.4%    1.5%
1/18/05   Medical Delivery  3/7/05   Energy            45.83  48.07   4.9%    2.7%
1/24/05   Energy Service    4/18/05  Pharmaceuticals   43.82  46.04   5.1%   -1.1%
1/31/05   Energy Service    4/18/05  Pharmaceuticals   44.61  46.04   3.2%   -2.6%
2/7/05    Energy            4/18/05  Pharmaceuticals   34.17* 35.54   4.0%   -4.3%
2/14/05   Electronics       4/4/05   Natural Gas       38.78  36.84  -5.0%   -2.3%
2/22/05   Energy            4/18/05  Pharmaceuticals   36.39* 35.54  -2.3%   -3.0%
2/28/05   Energy            4/18/05  Pharmaceuticals   37.98* 35.54  -6.4%   -4.6%
3/7/05    Energy            4/18/05  Pharmaceuticals   38.82* 35.54  -8.5%   -6.3%
3/14/05   Chemicals         4/18/05  Pharmaceuticals   71.75* 63.37 -11.7%   -4.9%
3/21/05   Defense & Aero    5/16/05  Environmental     67.98* 67.85  -0.2%   -1.3%
3/28/05   Biotechnology     6/13/05  Natural Gas       49.27  53.18   7.9%    0.5%
4/4/05    Natural Gas       5/9/05   Electronics       32.55* 30.90  -5.1%    0.4%
4/11/05   Medical Delivery  5/31/05  Networking & Inf  46.49  47.81   2.8%    1.1%
4/18/05   Pharmaceuticals   6/6/05   Natural Gas        8.69   8.80   1.3%    4.8%
4/25/05   Biotechnology     6/13/05  Natural Gas       52.00  53.18   2.3%    2.7%
5/2/05    Biotechnology     6/13/05  Natural Gas       51.63  53.18   3.0%    2.7%
5/9/05    Electronics       6/27/05  Energy Service    36.81  39.22   6.5%    1.3%
5/16/05   Environmental     6/27/05  Energy Service    13.70  14.35   4.7%    2.3%
5/23/05   Software          6/27/05  Energy Service    49.16  48.95  -0.4%   -0.1%
5/31/05   Networking & Inf  7/11/05  Brokerage          2.14   2.20   2.8%    2.5%
6/6/05    Natural Gas       10/24/05 Money Market      31.81  37.80  18.8%    0.8%
6/13/05   Natural Gas       10/24/05 Money Market      32.91  37.80  14.9%    1.4%
6/20/05   Energy Service    10/10/05 Transportation    52.50  57.86  10.2%   -1.9%
6/27/05   Energy Service    10/10/05 Transportation    52.80  57.86   9.6%    0.2%
7/5/05    Brokerage         8/29/05  Automotive        60.28  62.20   3.2%    0.9%
7/11/05   Brokerage         8/29/05  Automotive        61.96  62.20   0.4%   -0.4%
7/18/05   Biotechnology     9/6/05   Energy            58.94  60.87   3.3%    1.3%
7/25/05   Electronics       9/6/05   Energy            42.39  42.49   0.2%    0.6%
8/1/05    Energy Service    10/10/05 Transportation    57.98  57.86  -0.2%   -3.5%
8/8/05    Energy Service    10/10/05 Transportation    59.57  57.86  -2.9%   -2.6%
8/15/05   Natural Res.      10/24/05 Money Market      22.81  22.72  -0.4%   -2.5%
8/22/05   Pharmaceuticals   10/31/05 Banking            9.43   9.57   1.5%   -0.9%
8/29/05   Automotive        10/3/05  Natural Gas       35.80  35.38  -1.2%    1.3%
9/6/05    Energy            10/24/05 Money Market      47.49  45.05  -5.1%   -2.6%
9/12/05   Natural Gas       10/24/05 Money Market      39.61  37.80  -4.6%   -3.1%
9/19/05   Natural Gas       10/24/05 Money Market      41.63  37.80  -9.2%   -2.4%
9/26/05   Natural Gas       10/31/05 Banking           41.73  38.70  -7.3%   -0.6%
10/3/05   Natural Gas       11/7/05  Brokerage         43.12  38.32 -11.1%   -0.2%
10/10/05  Transportation    12/12/05 Energy Service    42.41* 46.24   9.0%    6.6%
10/17/05  Air Transport     12/12/05 Energy Service    36.86  40.00   8.5%    6.3%
10/24/05  Money Market      11/28/05 Paper & Forest     1.00   1.00  0.36%    4.8% (Interest earned)
10/31/05  Banking           12/5/05  Energy Service    37.65  39.20   4.1%    4.8%
11/7/05   Brokerage         1/9/06   Energy Service    65.15* 72.65  11.5%    5.9%
11/14/05  Transportation    1/3/06   Air Transport     45.71* 46.71   2.2%    3.1%
11/21/05  Electronics       2/6/06   Transportation    43.12  47.38   9.9%    1.2%
11/28/05  Paper & Forest    1/17/06  Energy Service    29.03* 30.44   4.8%    2.3%
12/5/05   Energy Service    2/21/06  Defense & Aero    66.23  71.36   7.7%    2.0%
12/12/05  Energy Service    2/21/06  Defense & Aero    68.86  71.36   3.6%    2.0%
12/19/05  Environmental     2/13/06  Air Transport     15.80  16.73   5.9%    0.5%
12/27/05  Air Transport     1/30/06  Energy Service    40.54  41.75   3.0%    2.4%

Money Market fund assumed to earn interest at a 3.70% annual rate
In order to keep this complicated page from becoming even more so, the trade results shown do NOT include the use of "stop-loss" tactics, which is now my recommended strategy. These are discussed in several other pages on this site, and there are some examples that illustrate the potential beneficial effects of using stop-losses. The more volatile sector funds such as those in high technology, Biotechnology, and Energy Service are more likely to get stopped out. In many such cases, the fund would have been held less than 30 days, so it would have been hit with Fidelity's 0.75% short-term selling penalty for Select funds.

Since it is unlikely that any investor would act on all of the weekly signals shown above and on the linked pages for prior years, here is an illustration of one use of the weekly trade list tables.

Starting on 1/3/05, the closest Monday to the start of 2005, 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

1/3/05    Automotive        2/14/05  Electronics       -0.9%    0.5%
2/14/05   Electronics       4/4/05   Natural Gas       -5.0%   -2.3%
4/4/05    Natural Gas       5/9/05   Electronics       -5.1%    0.4%
5/9/05    Electronics       6/27/05  Energy Service     6.5%    1.3%
6/27/05   Energy Service    10/10/05 Transportation     9.6%    0.2%
10/10/05  Transportation    12/12/05 Energy Service     9.0%    6.6%
12/12/05  Energy Service    Still held as of 1/3/06     0.7%    0.7%
Total return as of 1/3/06                              14.5%    7.4%
    accounting for maximum 2% annual management fee    12.5%

The calculation for the total return for the track is:
 (0.991)(0.950)(0.949)(1.065)(1.096)(1.090)(1.007) - 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%       2004 Weekly Trade List
2005           12.5%            7.4%
              ------          ------
Average(96-05) 17.1%           10.0%

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.

Comments and Implementation Issues

(Past comments may be deleted when they are no longer relevant)

January 3, 2006:

With the completion of another year (actually 52 trading weeks), we can take a look at how the Selects system did for 2005. For the year as a whole, it again did better than the broad market as represented by the Vanguard Index 500 fund, gaining 12.5% (after maximum 2% management fee) vs. 7.4% for the index fund. The overall performance in 2005 for both the Selects system and the index fund was a bit under the ten-year averages shown above. This is hardly a surprise because the fundamental nature of the investment climate changed in 2000 from a "secular" (i.e long-term, typically 15-20 years duration) bull market to a secular bear market. We have seen a cyclical bull market that has lasted around three years, which is a long duration for cyclical bulls during a secular bear. That does not bode particularly well for stocks in general for 2006, particularly because it is a mid-term election year, and such years have been overall lackluster performers.

Looking at the trades for 2005, there were six completed ones plus the Energy Service trade open at the end of the year. That is in line with the 5-7 trades expected. Three of the six completed trades, the last three as it turned out, were profitable. The open trade is just a little on the plus side, so we can't say much about how it will turn out although oil prices are moving up now. I expect about 2/3 of the trades to be profitable, so the past year was below average in that regard. Last year the losing trades did worse than the market over the trade periods and the winning trades did better, which is typical of how the system works. The good trades more than made up for the bad ones at the beginning of the year both in absolute terms and relative to the market. All in all, 2005 provides yet another real-time example of the value of the Selects Switching System.

The trade for this week is interesting in that it moves from Transportation to Air Transportion, which are clearly related. It shows one of the advantages of Fidelity's wide array of sector funds. They have more than twice as many as Rydex and ProFunds, the other two mutual fund companies with a selection of sector funds across the entire economic spectrum. Many of Fidelity's Select funds are focused on narrow sectors, and there often are times when a narrower sector will perform much better than a broader sector of which it is a part. We will see if that is the case in this instance. The Selects are designed so one can invest in broad sections of the economy, such as Technology, or in focused narrower sectors. In the case of Technology, the broad sector, there are Select funds for Electronics, Computers, Software, Developing Communications, Wireless and Networking.

September 26, 2005:

The energy sectors continue to show exceptional strength as they have for more than three months. No doubt that part of the gains result from the damage done by the two gulf coast hurricanes. However, those disasters magnified an energy crunch that had been developing for much of the year. (Like me, you probably were bothered when gas prices rose to be a little above $2 a gallon, and now you would be happy to pay a price that "low".)

The three main Select energy funds (Energy, Energy Service, Natural Gas; Natural Resources holds energy and metals/minerals stocks) have been top-ranked quite a few times this year. They tend to be quite volatile, which means there is enormous profit potential, but substantial risk, particularly if they are bought "late." Unfortunately, there is no reliable way to tell when they are going to make another of their incredible runs or when they are about to fall quite a bit. There are at least two tactics that can be used to manage the risk. One is not to put all of one's sector fund investments into energy sectors. In other words, diversify by also owning some other sector funds. Moreover, one's total investment in sector funds should not be very great. My normal recommendation is that 10-20% is appropriate for most investors. The second tactic is to use a stop-loss for sector funds in general and energy sectors in particular. My research has shown that a stop in the 7-8% range works fairly well. However, this is not a "magic number." Investors can adjust in either direction to fit their risk tolerances. Keep in mind that stop-losses will backfire sometimes when the fund (or stock) just sold turns around and moves up again. While not pleasant, it is important to understand that the purpose of a stop-loss sale is to avoid a severe drop, which can really hurt a portfolio. With the energy sectors, such drops are not rare events.

July 7, 2005:

Last week three Selects funds--Electronics, Environmental, Software-- had sell signals. This can cause a minor problem for those who want some modest sector fund divesification by holding more than one uncorrelated fund in their portfolios. For example, an investor might have been holding Electronics and Environmental. The system if followed without modification would call for exchanging both of these funds into Energy Service, an action that would reduce divesification.

The tactic I normally use in cases like this is move part of the portfolio into a money market fund until an uncorrelated fund rises to the top of the rankings. In the example above, one might exchange Electronics into Energy Service and Environmental into money market. As things worked out, Brokerage and Investment Management rose to the top of the rankings, and that fund is not highly correlated with Energy Service. Continuing the example, the money market holdings from the Environmental sale would be used to buy Brokerage. Sometimes it may take several weeks for an uncorrelated fund to rise to the top. Had Energy or Natural Gas (or Natural Resources to a lesser extent) become the top-ranked fund, they would not have been purchased since they have meaningful correlations with Energy Service.

June 20, 2005:

The market has continued to churn in a generally sideways direction with a bit of an upside bias. The quantitative models I use to assess the relative risks of owning stocks are generally positive, but it would not take a whole lot of weakness to generate sell signals in most cases.

The energy sector strength discussed in the previous commentary came at a time when the market was about to fall for a couple of months. Since those sectors tend to be more volatile than the broad market, those trades fell by more than the market indices. Since then we have had some rotation in leadership, first into medical and biotech, then into high tech, and now back to energy. This is typical of sideways markets. Unfortunately, it is difficult to read much into the churning action. Sometimes it indicates the market is topping out due to lack of strong sector leadership that is typical of bull markets, but at other times it defines the sectors that will lead the forthcoming bull market. One should pay attention to the direction of the breakout from the sideways action. That is likely to mark the beginning of a meaningful move in one direction or the other. I wish I could tell you in which direction, but it would be a guess that would be no better than one you can or would make.

March 7, 2005:

The great run in Medical Delivery has come to an end as the system signaled (just barely as the fund is still in an uptrend) to sell that fund. The first purchases were four months ago, and the ones in November led to trades with over a 20% profit. The later purchases, while not as profitable, outperformed the index fund over the trade periods. These are the types of sector moves, and there are usually several each year, that make the Selects Switching System work so well. It looks like we are in the midst of another such big move up in the energy sectors. Energy and Energy Service have been the top ranked funds six of the last seven weeks. Coincidentally, Medical Delivery also did that in November and December.

The broad stock market looks like it is working its way higher in fits and starts unlike the steady move up last fall. The primary risk reduction models that I use to manage some accounts have given sell signals over the past month. The year after a presidential election on the average is not a particularly good one, so the near-term outlook for stocks may not be very strong. In any case, strong sectors often make nice moves up even when the market is going nowhere or falling modestly. Conservative investors may want to lighten up on their sector and other holdings for the time being. More aggressive ones can stay mostly or fully invested in strong sectors since the overall trend of the market is still to the upside.

February 22, 2005:

The new year is off to a bit of a rocky start. January was a down month for the major indices. Historically when that has been the case, the rest of the year sees higher stock prices about half the time and lower ones about half. In other words, you might as well flip a coin if you want a prediction about how the rest of the year will go. When January is up, the rest of the year gains around 80% of the time, and on the average those gains are fairly healthy. After down Januarys, the rest of the year on the average shows not much change. I used the S&P 500 index in the calculations.

Since the year after a presidential election, on the average, is not a good one for stocks, the combination with the weak January does not make me optimistic about the chances of having strong stock market performance in 2005. None of that affects my trading decisions because they are based on formulas that do not incorporate any monthly or yearly effects. As long as I am discussing these, I should point out that years ending in 5 historically have been very good for stocks. However, I don't put much weight on that effect since it is based on far fewer past observations than the "January barometer" (which occurs ever year) and the presidential cycle (every four years). Moreover, the years ending in 5 that are pre-election years (1995, 1975, 1955 ...) have done much better than those that are post-election years like 2005.

For the most part, the strongest sectors recently have been in energy. Energy Service and Energy purchased in late January and early February are off to quite strong starts showing gains over 6% in less than a month. A breather, perhaps a "pause that refreshes," would not be a surprise at this point. My trading methods for the Select funds are designed to hold on when that happens awaiting further increases. That seems to be where we are at now in the Medical Delivery trades initiated in November and December. However, if that fund does not resume outperforming most of the other sectors, it could be sold fairly soon.

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