For all previous posts on the Fidelity Select Rotational System, please visit the archive.
There is quite a bit of history behind this system. Since some of you are likely new(er) here, I’ll start with a quick synopsis.
My wife has a 401K with Fidelity. Of course every good trader wants to pilot all available capital, and I’m no different. But when its the wife’s money, one wants to make sure it is steered in the right direction. While investigating rotational systems, I discovered a site which presented a system using Fidelity Select Sector Funds (the site is referenced in the archive). This discovery presented a synergy of sorts – I could build and trade a rotational system in my wife’s Fidelity account. Something about birds and stones came to mind. Anyway, the primary purpose behind building this system has been to use it to trade my wife’s account. I want to be clear that the basic idea as well as some of the component parts of the system are not original to me. I will reference from where the ideas came as necessary.
So with that out of the way, what were the goals for this system?
- Beat the S&P 500
- Protect my wife’s account from catastrophic loss
- The system must be robust
- Spend very little time managing the system
Let’s look at each goal. There is ample research to support that a sector rotational system will beat the S&P and that these systems are robust. Perhaps the most accessible research is from Mebane Faber: Relative Strength Strategies for Investing. (This paper lists additional resources to support its foundations.) So that takes care of goals 1 and 3.
As for protecting the account from catastrophic loss, Mr. Faber’s work can also be referenced – A Quantitative Approach to Tactical Asset Allocation details, among other beneficial aspects of a rotational system, the use of moving averages to protect an account from catastrophic drawdowns. Taking a similar approach ensures goal 2 is met.
As for goal 4, the very nature of Fidelity Select Sector Funds limits the amount of time one can spend managing the system. Because the funds require a 30 calendar-day hold time, it will be financially punitive to make more than a few trades a month. Fidelity will increase the penalties each time a round-trip trade lasting fewer than 30 calendar-days is made, until the account is effectively locked out from trading in the funds.
In the next post, we will examine the specifics of the existing Fidelity Select Rotational System (for which I’ve posted out-of-sample results over the last 2 years) and discuss where I seek to make improvements in order to finish the development. There will be some cool graphs and statistics and stuff, unlike this post.
The finished system will begin live trading within a few weeks.
Do you mind if I ask how your wife’s 401k has access to the Fidelity Funds? Is this a default choice, rollover, or brokerage link? I have two Fidelity 401k’s, but the sector funds are not available in either one.
Thanks.
Bozo, it was rolled over into Fidelity when she severed from her employer a few years ago. I guess technically it is no longer a 401K. Sorry for any confusion.
I use a similar system for managing the 401k that comes with my company – be aware that often, with these terrible company plans, the trading windows are actually longer and are at the fund-level. Meaning, the particular small cap fund that it is available in my 401k actually has a 89 day holding window. Which is just bullshit in my mind and part of the reason I can’t wait for ETF-based 401ks to become more available.
Do you have a brokerage account option in your 401k? Then you can buy anything. Some do, some don’t; it’s up to the company to ask for it. If yours does, in many cases it has advantages over using the default fund choices.
Nah, no such thing on our account – just a set of shitty funds.
Here’s a guy who has made a Fidelity select rotation system and backtested it.
http://seekingalpha.com/instablog/709762-varan/251242-a-low-drawdown-strategy-for-sector-rotation-for-fidelity-select-funds
Dave, thanks. I came across that the other day. I’m not sure I exactly understand what he is doing, but I aim to run my own test on it to check his results.
Wood, it looks like Paper & Forest and the Networking & Infrastructure funds are still closed to new investors. But there are new select funds, and some renamed funds..
http://fundresearch.fidelity.com/mutual-funds/performance-and-risk/316390459
http://fundresearch.fidelity.com/mutual-funds/performance-and-risk/316390483
http://fundresearch.fidelity.com/mutual-funds/performance-and-risk/316390574
Dave, I’m using this list here: http://fundresearch.fidelity.com/mutual-funds/category-performance-annual-total-returns/SECTOR
Hey Woodshedder, question for you. Where to you obtain all of the data that you use for your back-testing? I’m trying to find a good source for a system I’m developing. Also, I’ve been scouring the internets looking for intraday put/call ratios. Do you know of anywhere to pull these from? Any help you could provide would be much appreciated
echeshier, for the Fidelity Select System, I’m using data from Yahoo. For all other testing, I use and highly recommend Norgate Premium Data.
I’ve never used Put/Call ratios, so I don’t know where to pull them from. Perhaps someone that does can chime in.
Thank you sir – just checked out Norgate and pricing looks pretty decent compared to some others I’ve seen.
Echeshier – I don’t know what software you are using, but Norgate integrates seamlessly with AmiBroker. All of their pricing is very competitive, if not the most affordable, and their customer service is great. Check out their delisted data. It was definitely the cheapest I found.
Right now I’m working in SQL Server using various crappy feeds I’ve found to develop my own database/system. I just checked out AmiBroker and yeah, looks like I’m re-inventing the wheel. Thanks for the heads up
Wood,
As for your forth point, I was building a system recently and needed the same thing. So here is something I came up with. Only trade the system on the first trading day of the month. Here is the Amibroker snippet I used:
TradeDayOfMonth = BarsSince( Day() < Ref(Day(),-1) ) + 1;
Buy = TradeDayofMonth == 1 and yourBuyRules;
Maybe this is something that would be useful to you. As always, thanks for serving up great ideas.
Nice code Red. I’ve got something similar, but not as simple. When I get this FSF system “finished” I’ll email it to you. Regards my friend!
Don’t know if you saw this or not but the deDateTime dll has several functions that would make trading at the beginning/end of month even easier. I am talking about the deFlagFirstTradeDayOfMonth() and deFlagLastTradeDayOfMonth() functions. I think the file is in the files section of the Yahoo/Amibroker board. If you cannot locate it let me know and I can forward the zip file to you.
Regards,
John
Wood,
I run into your post when I was testing the same Fidelity strategy. I didn’t do as thoroughly testing as you had. The CAGR and drawdown are similar if I use Roc(132). Recently I also thought of using the short term ROC to avoid sharp draw down after a peak. But if I set rotation score to no-rotat for a negative short roc(5) or roc(10), the system seems not to work any longer. I am very curious how you use the short ROC(21) in your strategy. Also have you tried to dynamically set position size based on ROC/volatility score?
I would appreciate if you could share some of your code with me, mainly the piece of roc(21) and shifting into cash.
Regards,
David