ï   Member Login ï   Sector Timing Intro ï   Sector Rotation ï   Which Sectors ï   The System ï   Performance   ï   Order Online ï   Sector F.A.Q. ï   Contact Us ï   Advertise   ï   Stock System ï   Momentum Stocks ï   ETF Funds ï   Earnings Trading ï   Stock Market Crash Henry Ford's MARKET SECTOR FUND TIMING STRATEGY: A 100% Mechanical System for Fidelity and Rydex no-load Sector Funds SECTOR ROTATION STRATEGY FAQ This FAQ will start out with some of the recent questions posed and I will add to it as new questions are posed and I have time. New questions and responses will be moved to the top of the file. Q. Subject: Profit Factor" formula giving seemingly incorrect advice Please tell me I am doing something wrong. I am thinking of using your "profit factor" formula without timing to switch my wife's 401K in and out of three mutual funds. They are MSCDX, MIEDX, and FBGRX. It just told me to go into a fund that has gone down for the last 20 days instead of one that is going up currently. Please tell me what is the deal here, what am I doing wrong, or is this a fluke? A.The essence of the system is the supportive nature of the the individual funds between which you switch and the cyclical nature of their growth. Out of the 39 Select funds there are really only 3 that meet this criteria...FSELX, FSVLX and FSESX....98% of the profit is in these three issues and you can trade this system looking at ONLY these three issues. Remember, in my developmental testing I ran over 19000 permutations and combinations to find these three. It is not that they are the best perormers, it is that they are the best fit to flatten the gain curve. The sector rotation is used to determine when one is declining that will be covered by another on a different cycle. I have no idea, (without exhaustive testing), of the cyclidity of the funds you have chosen or whether they work together to be supportive. This system does not look for the stock that is growing the fastest, but one which has lost it's downward momentum and now is preparing to go back into a growth stage. We are looking for diminished volatility; a flattening of loss, and then a move above the volatility band indicating a change of direction...All of this is accomplished by the simple little formula that you referred to. We WANT to be in funds that have been in declining bases. If you want to add a very simple timing rule to indicate whether these funds are indeed now in a growth stage, simply look for a higher close today than in the last few trading days, with increased momentum. The fund with the minimum volatility over 28 days with a new break to the upside will be a better near term growth candidate then one which is beating every other issue and collapses the day after you buy it. Again, there are literally scores of funds that you could rotate between using this strategy, but they cannot be picked at random...Their performance must overlap each other to smooth out the gain curve. I hope this helps to shed a little light, I know that this is a difficult concept to grasp when everyone wants to buy todays hot performer, but it will prove itself over time. Q. In your literature you state a drawdown of 8.03%, but I don't see that in the trade by trade results? A. In the literature we used maximum system drawdown figures. The trade by trade shows closed drawdown figures. (Literature was worst case). ------------------------------------------------------------------------------------ Q. I have read your rationale on the selection of the 5 sector funds to rotate, but since you are really trading only 4 funds, it would seem that I only need to look at them? A. As explained below the five funds were the optimium during the permutations and combinations test. In actual practice 98% of profits come from only three funds and for a simplified system you could just trade FSELX/FSESX/FSVLX and get about the same return...These are the real systems drivers in the strategy and you will see that when we rotate the new RYDEX funds we will only be rotating the 3 equivelant funds. ----------------------------------------------------------------------------------- Q. You mentioned in the manual that there would be a copy of a prospectus included in the back of the manual, but I can't find it? A. Since the prospectus info is updated periodically and users already have access to the Internet, we decided it was more appropriate to direct folks to the Fidelity site at: http://www.fidelity.com Individual prospectus are available here in complete form for each fund. ----------------------------------------------------------------------------------- Q. Why is there such a discrepancy between the historical prices I see on Sector Funds and those which you show in you histories? As a matter of fact, why do even some of your fund prices show historical changes in just the last month? A. Mutual Funds, for those who have never dabbled with them before, are a bit different than stocks. Since the fund is a composite of many stocks, there are times when individual stocks with the pool declare dividends in their own right. The Fund is required to pass these along to the owner, either directly or by re- investment, depending upon the way you have set up your account. If the Fund were to throw these distributions into their price, there would be price fluctuations in their daily data which would not truly reflect their profit or loss. In order to keep end of the day prices equivelent, so that you can pick up any paper in the land and see if you are making or losing money, The past NAV prices have to be re-adjusted for their entire history. Nothing has really changed but the accounting. Percentage gain or loss all remain relative. ------------------------------------------------------------------------------------ Q. How do we adjust our tracking worksheets to account for this? A. The individual, downloadable Excel and VistaCalc sheets from the user section are updated nightly. When there is a NAV change due to distribution, the.zip files and the entire historical database files are replaced so you can retrieve them. You are notified by email, on the website, or in the nightly update whenever this takes place. The last time this occurred was on 20 April. -------------------------------------------------------------------------- Q. First, your system provides for a possible rotation after 31 days. Indeed, your timing system so far this year has signaled a fund transfer about once a month. How do you avoid FidelityÌs limit of four transfers per year? A. Over the nine years of historical data, the strategy has averaged 3.9 exchanges per year. Fidelity currently has no limit on the number of exchanges that can be made between Select Funds. It has always reserved the right to inact limitations in the future, but that right has never been exercised in the last 14 years. In my personal opinion, with approximately 12,000,000 Fidelity Investors with nearly 900 BILLION in assets under management, It would take a very rare event indeed, for them to change their policy, and even in that unlikely event, there would have to be timely notification. It is estimated by one source that there are over 700 different sector switching strategies in use by investors today; most specifically targeted at Fidelity and Invesco funds. With the advent of Rydex Sector Funds, even more competition now exists for these strategies and any major shift in philosophy would cause a massive drain from existing fund pools. ------------- Q. Secondly, in their prospectus, Fidelity reserves the right to refuse "simultaneous orders affecting significant portions of the fundÌs assets in particular exchanges that coincides with a Îmarket timingÌ strategy." A few paragraphs earlier, they define, "1% of (each fundÌs) net assets or $1,000,000, whichever is less" as being a significant enough amount to warrant restriction. How do we avoid Fidelity's simultaneous order limit of $1,000,000? B. Essentially the same answer as above...They reserve the right, but in 15 years have never exercised the right even though many times that amount is rotated through their funds at any one time. Again, it would be detrimental to the attractiveness of the funds to investors, since the sector advantage was precisely the reason these funds were established. -------------------------------------------------------------------------------- Q. If I switch between different Select Funds must I pay the 3% load each time? A. NO!....This is a very common misconception that has somehow circulated. The 3% load fee is paid one time on those funds when they first enter any of the Select Funds. Even if you were to switch funds outside of the Selects and then later bring them back inside a Select Fund, their accounting keeps track of those shifts and WILL NOT double bill you. The only fee you pay is the $7.50 exchange fee and the and the exchange fee of $7.50. If you exchange online or via touchtone phone the whole fee is only $7.50. The exception is if you are exchanging between funds in less than 29 days from the time you first entered in which case you are responsible for a 3/4 of 1% charge. In addition there is a $12.00 annual account fee for accounts less than $2500. --------------------------------------------------------------------------------- Q. Do I have to pay taxes when I switch funds. A. Taxes are due on profits above basis at the end of the tax year. In addition you are responsible for taxes on dividends and distributions. This is true of ANY investment whether stock or mutual fund. If you are investing in an IRA or SEP-IRA, or other retirement program, there are different tax consequences which can provide substantial advantages. Check with your accountant. It has always amazed me that folks are upset that they are going to have to pay taxes on profits. I have never found it objectionable to make enough money to HAVE to pay taxes. The only way to escape, (at least temporarily), the tax bite, is to become a "Buy and Hold" investor, but that will still not save you from taxes on dividends and distributions. --------------------------------------------------------------------------------- Q. Would you advise then, taking the distributions and dividends when declared and using those to put towards taxes. A. Again, ask your accountant, but for myself I would automatically re-invest those addiitions to increase my fund buying power. Why take proceeds out of your funds to pay taxes when you would lose the advantage of a paid up 3% load, particularly if you are making regular deposits into your Select Funds account. ------------------------------------------------------------------------------------ Q. When will we know the results of the RYDEX study to see if we can use these no-load, unlimited switching funds. A. I needed 30 days of data before I could begin the analysis, so I expect to have some preliminary results the first week of May. I will notify everyone when I have news to report. ------------------------------------------------------------------------------------ Q. I have noticed in your historical trade by trade data that while you state you watch 5 funds for rotation, I only saw FDCPX traded one time, (it was a position you held for 6 months), and I never saw FSPHX traded at all...What gives? A. I love enquiring minds, and you have tumbled onto the true secret of rotation. If you will remember from the manual, I wrote a program which did the statistical analysis of Funds in over 19000 permutations and combinations to determine the best probability of profitable fund combinations. This analyis was done for the first investment year, 88-89 and predicted that these funds would provide the best compatibility to work together to smooth the gain curve. Truth is that there were still many times when the funds were supportive of each other simultaneously and the dominant fund prevailed. As an example, even though FDCPX was the selection for that 6 month period and made 8.9% profit, FSELX would have made 8.5% for the same period. A minor difference, perhaps, but we take what we can get. FDCPX was second best until November '93-five years after it was selected for the list. Remember, also that my testing employed 91 one year testing windows, each advanced by one month at a time from 88-98, and during these tests found FDCPX and FSELX to be consistant winners in multiple trials. This FAQ is far from complete and I will add to it as I get questions from users. Drop an email by clicking the button below.

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