A Look at Fidelity Select Funds
Well, I suppose there is some room for improvement...
Sometimes, though, it's both easier and more constructive to zoom out a bit and look at sector breadth as opposed to individual-stock breadth. Therefore, this week we're going to take a look at Fidelity Select Funds.
What is it?
We're all familiar with Fidelity, of course – it is one of the largest fund companies in existence. Over 20 years ago, in order to give investors a chance to concentrate their portfolios in certain sectors, the fund company rolled out several narrowly-based funds. Over the years, they have added to their offerings and now have over 40 funds in which we can invest.
Widely-respected veteran market analyst Walter Deemer popularized a look at these sector funds through publications such as Barron's. Mr. Deemer's basic take was that if a market was healthy, then a good number of these Select funds should be out-performing cash, say over the past 90 days. By watching how many funds were doing so, we could get a reading on how equities in general were faring.
Why should we follow it?
Unlike a typical advance/decline statistic, monitoring the Fidelity Select funds gives us an idea of how the very best stocks in a broad swatch of sectors are doing. We don't have to worry about a bunch of bond funds, or foreign shell companies, or doggy small-cap stocks. We're getting a pulse on the best equities available.
The Fidelity Select indicator has timed several important market inflection points, and gives a good read on overall market health. Like most breadth figures, this data can be used in both a trend-following and contra-trend fashion by watching trends in the indicator as well as true extremes. Because it is based on closing NAV values, the raw data is publicly available and updated daily.
What are the challenges in using it?
While there are more than 40 funds now available, that wasn't always the case. So when we go back and look at some of the prior readings, we can see dramatic jumps on a daily basis because the funds were relatively few. That makes it difficult to interpret trends or have much faith in extremes.
Over the past few weeks, it might seem like I've been picking out only those indicators that are showing bearish divergences in order to drive home a point. That's really not the case – it just so happens that most of the indicators I follow are showing very unusual readings that are not typical of a market hitting new highs.
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