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.