iBankCoin
Joined Nov 11, 2007
1,458 Blog Posts

Fidelity Sector Funds Rotational Strategy: Performance After 2 Years

It has been almost 2 years since I set out to build/test a rotational strategy to trade the Fidelity Select Sector Funds. Here is a link to all the posts about how the system was developed: Fidelity Select Rotational Strategy.

Because the Fidelity Sector Funds (FSF) do not incur slippage or commissions, the results are as close to actual as they could be without taking the trades and having them audited by a 3rd party.

I’ve run the original code (available in the link above) using the same FSFs listed in the archive posts. The test was run from 1.19.2010 (Date of the final post) to 1.12.2012. The results are below:

The system has achieved 400 basis points of out-performance and reduced the buy and hold drawdown by one-third. I did not account for a return on cash (which would improve the system results slightly). I also did not account for any commissions/slippage for SPY (which would very slightly reduce the buy and hold results).

These out-of-sample results are very encouraging. I am beginning to make some changes to the system which I believe will make it even more robust. Look for a post soon. Assuming I am satisfied with the changes, I plan to begin trading it live at the end of January or early February.

The equity curve for this period is below:

Green means the system was either partially or entirely in cash. Drawdowns are shown in the lower pane.

The system is currently long Construction and Housing; Biotechnology; and Defense and Aerospace.

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15 comments

  1. blink

    Do you use total return data for backtesting this system?

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  2. FOLLOWMY529.COM

    Wood- thanks for the update. I have been backtesting my rotation system using FSF and concluded a trigger is needed to ensure you donโ€™t invest when the โ€œbestโ€ funds are falling in price. I searched the web to see if anyone else has a system and found yours. I am glad to see you found similar results and I think we came up with similar solutions. Looking forward to your ideas on improvements. Great work.

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    • Woodshedder

      Thanks! I am happy to note that when you google search “fidelity rotational strategy” or something similar, my articles are the first ones listed.
      As for not buying when the best are falling, that is a neat idea. I think that adjusting for volatility may help with this, but there might be a better way.

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  3. Bozo on a bus

    Really good performance, and the Sharpe ratio is quite high.

    Question: what are the four short green bars at the bottom of the plot?

    I compared this system to a couple of newsletters that (as best as I can tell) use the same funds – you have notably better figures.

    Strong work, Woodshedder. Thanks for sharing it.

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    • Dave in Philly

      short green bars mean the system was partially in cash?

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      • Bozo on a bus

        Ah yes, thanks.

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        • Woodshedder

          Right, and you can see how much cash by using the right side axis.

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          • Bozo on a bus

            I’m sorry, but now I’m confused. How do you get a partial cash position? I thought you only traded one fund, and at the end of the 30 day holding period, if the SPX was below its 50 DMA, you sold that fund and went 100% cash. Did I miss something reading the old posts?

            Just to make sure I understand the ground rules – the ROC period is 90 days, and the volatility filter is 252 days. The minimum holding period for a fund is 30 days, but can be any number of days beyond that. But I still can’t figure out how there were 53 trades in only two years.

            Thanks for the help. Apologies for needing so much hand-holding.

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            • Woodshedder

              Bozo, no problem. It can be confusing. I have to go through it in my own head a couple of times even to explain it to you ๐Ÿ™‚

              Let’s say the system starts out 100% invested with three funds. Let’s say after 30 days that 1 of the funds has fallen out of top 3 in terms of the ROC rank. It is then sold on the 31st day. The other 2 funds are held because they are still ranked in the top 3.

              However, in that initial 30 day holding period, the moving average filter has kicked in, meaning that the SPX is trading beneath its 50 day moving average. This means that the position that was sold on the 31st day will not be re-filled with a new position. Thus, that position becomes cash.

              Now, the other 2 positions are monitored daily. As long as they stay in the top three, they will not be sold. As soon as one or both drop out of the top three, they are sold at the next close. If, when they are sold, the SPX is still beneath its 50 day average, they will not be re-filled.

              As for the 1st position that was sold, but not re-filled (due to the moving average filter) as soon as the SPX climbs above the 50 day average, that position is filled at the next close with the top ranked fund. If the 2 top-ranked funds are already held by the system, it will take the 3rd ranked fund.

              I hope this makes sense. If this doesn’t answer your 53 trades in 2 years question, let me know.

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              • Woodshedder

                Bozo, I see one problem. It holds 3 funds, not 1. That will answer your 53 trades question, I think.

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                • Bozo on a bus

                  Yep, that’s the answer, three funds. I read one fund in the very beginning and missed the change to three. Thanks again.

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  4. bhh

    Nice work. I have been using SHY in lieu of cash in my own trading and have been very pleased with the results. It provides a little extra return, mostly though a monthly dividend so make sure you are using dividend adjusted data for it if you test using that as an alternate to cash.

    Nice work. We should catch up one of these days.

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