Category Archives: Mutual funds

A Different Kind of Bond Barbell

The “barbell” approach to bond investing typically involves buying a long-term bond fund or ETF and a short-term bond fund or ETF.  The idea is that the long-term component provides the upside potential while the short-term component dampens overall volatility and “smooths” the equity curve.  This article is not intended to examine the relative pros and cons of this approach.  The purpose is to consider an alternative for the years ahead.

The Current Situation

Interest rates bottomed out several years ago and rose significantly from mid-2016 into late 2018.  Just when everyone (OK, roughly defined as “at least myself”) assumed that “rates were about to establish an uptrend” – rates topped in late 2018 and have fallen off since.  Figure 1 displays ticker TYX (the 30-year treasury yield x 10) so you can see for yourself.

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Figure 1 – 30-year treasury yields (TNX) (Courtesy AIQ TradingExpert)

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In terms of the bigger picture, rates have showed a historical tendency to move in 30-year waves.  If that tendency persists then rates should begin to rise off the lows in recent years in a more meaningful way.  See Figure 2.Figure 2 – 60-year wave in interest rates (Courtesy: www.mcoscillator.com)

Will this happen?  No one can say for sure.  Here is what we do know:  If rates decline, long-term treasuries will perform well (as long-term bonds react inversely to the trend in yields) and if rates rise then long-term bond holders stand to get hurt.

So here is an alternative idea for consideration – a bond “barbell” that includes:

*Long-term treasuries (example: ticker VUSTX)

*Floating rate bonds (example: ticker FFRAX)

Just as treasuries rise when rates fall and vice versa, floating rate bonds tend to rise when rates rise and to fall when rates fall, i.e., (and please excuse the use of the following technical terms) when one “zigs” the other “zags”.  For the record, VUSTX and FFRAX have a monthly correlation of -0.29, meaning they have an inverse correlation.

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Figure 3 displays the growth of $1,000 invested separately in VUSTX and FFRAX since FFRAX started trading in 2000.  As you can see the two funds have “unique” equity curves.

Figure 3 – Growth of $1,00 invested in VUSTX and FFRAX separately

Now let’s assume that every year on December 31st we split the money 50/50 between long-term treasuries and floating rate bonds.  This combined equity curve appears in Figure 4.

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Figure 4 – Growth of $1,000 50/50 VUSTX/FFRAX; rebalanced annually

Since 2000, long-treasuries have made the most money.  This is because interest rates declined significantly for most of that period.  If interest rise in the future, long-term treasuries will be expected to perform much more poorly.  However, floating rate bonds should prosper in such an environment.

Figure 5 displays some relevant facts and figures.

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Figure 5 – Relevant performance Figures

The key things to note in Figure 5 are:

*The worst 12-month period for VUSTX was -13.5% and the worst 12-month period for FFRAX was -17.1%.  However, when the two funds are traded together the worst 12-month period was just -5.0%.

*The maximum drawdown for VUSTX was -16.7% and the maximum drawdown for FFRAX was -18.2%.  However, when the two funds are traded together the worst 12-month period was just -8.6%.

Summary

The “portfolio” discussed herein is NOT a recommendation, it is merely “food for thought”.  If nothing else, combining two sectors of the “bond world” that are very different (one reacts well to falling rates and the other reacts well to rising rates) certainly appears to reduce the overall volatility.

My opinion is that interest rates will rise in the years ahead and that long-term bonds are a dangerous place to be.  While my default belief is that investors should avoid long-term bonds during a rising rate environment, the test conducted here suggests that there might be ways for holders of long-term bonds to mitigate some of their interest rate risk without selling their long-term bonds.

Like I said, food for thought.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

Utilities at the Crossroads

A lot of eyes are firmly fixed on Utilities at the moment.  And for good reason.  As you can see in Figure 1, the Dow Jones Utilities Average is presently facing a key resistance level.  If it breaks out above the likelihood of a good seasonal rally (more in a moment) increases significantly.

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Figure 1 – Utilities and resistance (Courtesy AIQ TradingExpert)

One concern may be the fact that a 5-wave Elliott Wave advance appears to possibly have about run its course (according to the algorithmically drawn wave count from ProfitSource by HUBB which I use).  See Figure 2.

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Figure 2 – Utilities and Elliott Wave (Courtesy ProfitSource by HUBB)

For what it is worth, the March through July timeframe is “typically” favorable for utilities.  Figure 3 displays the growth of $1,000 invested in the Fidelity Select Sector Utilities fund (ticker FSUTX) ONLY during the months of March through July each year starting in 1982.

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Figure 3 – Growth of $1,000 invested in ticker FSUTX Mar-Jul every year (1982-2018)

For the record:

*# times UP = 29 (78%)

*# times DOWN = 8 (22%)

*Average UP = +9.3%

*Average DOWN = (-5.8%)

*Largest UP = +21.1% (1989)

*Largest DOWN = (-25.8%) (2002)

*Solid performance but obviously by no means nowhere close to “a sure thing”.

*It should be noted that several of the “Down” years occurred when the S&P 500 was already in a pretty clearly established downtrend (2001, 2002 and 2008), i.e., below its 10-month moving average.  See Figure 4.

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Figure 4 – S&P Index w/10-month moving average (Courtesy AIQ TradingExpert)

Summary

Utilities are flirting with new all-time highs and March through July is a “seasonally bullish” period for utilities.  Does that mean “happy days are here again, and we should all be piling into utilities?  Yeah, isn’t that always the thing about the markets?  There is rarely a 100% clear indication for anything.

As always, my “prediction” about what will happen next in utilities is irrelevant and I am NOT pounding the table urging you to pile in.  But I can tell you what I am watching closely at the moment:

*The S&P 500 Index is flirting right around its 10-month moving average (roughly 2,752 on the S&P 500 Index).  If it starts to break down from there then perhaps 2019 may not pan out so well for utilities.

*The Dow Jones Utility Average is facing a serious test of resistance and may run out of steam (according to Elliott Wave).

*But a breakout to the upside could well clear the decks for utilities to be a market leader for the next several months

Focus people, focus.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

When to Buy Energy Stocks

Crude oil and pretty much the entire energy sector has been crushed in recent months. This type of action sometimes causes investors to wonder if a buying opportunity may be forming.

The answer may well be, “Yes, but not just yet.”

Seasonality and Energy

Historically the energy sector shows strength during the February into May period.  This is especially true if the November through January period is negative.  Let’s take a closer look.

The Test

If Fidelity Select Energy (ticker FSENX) shows a loss during November through January then we will buy and hold FSENX from the end of January through the end of May.  The cumulative growth of $1,000 appears in Figure 1 and the yearly results in Figure 2.

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Figure 1 – Growth of $1,000 invested in FSENX ONLY during Feb-May ONLY IF Nov-Jan shows a loss

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Figure 2 – % + (-) from holding FSENX during Feb-May ONLY IF Nov-Jan shows a loss

Figure 3 displays ticker XLE (an energy ETF that tracks loosely with FSENX).  As you can see, at the moment the Nov-Jan return is down roughly -15%.

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Figure 3 – Ticker XLE (Courtesy AIQ TradingExpert)

All of this suggests remaining patient and not trying to pick a bottom in the fickle energy sector. If, however, the energy sector shows a 3-month loss at the end of January, history suggests a buying opportunity may then be at end.

Summary

Paraphrasing here – “Patience, ah, people, patience”.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

Prepare to Bounce

2018 sure was a great year for the stock market.  For almost a month anyway.  Since then, not so much.  And on the heels of last week’s selloff a lot of pundits and prognosticators are suggesting more loudly that the Great Bull Run is dead. And maybe they are right.  But maybe not.

It is almost always a mistake to hang your hat on one indicator to guide your actions going forward.  But at the same time, sometimes one indicator generates a signal so clear it perhaps should grab your attention.  Let’s look at one that is on the verge of sending an important signal.

The VixRSIRatio Indicator

This is an indicator that I developed a number of years ago by basically – I am going to use some highly technical terms here to describe the process I followed so please try to stay with me – mashing together several other indicators from other people.  If you are interested in the actual calculations they appear at the end of the article.  For now, just know that I refer to it as VixRSIRatio.  As I follow it, it gives meaningful signals very infrequently.  But that is OK as the signals it does give often prove to be useful.

For our purposes we will apply it to ticker SPY – an ETF that tracks the S&P 500 Index. The rule is simple:

*A “Bullish Alert” occurs when VixRSIRatio drops to -210 or below and then turns up.

That’s it. Now please note the use of the phrase “Bullish Alert” and the lack of the words “You”, “Can’t” and “Lose”, as well as the lack of the phrase “by putting all of your money in the market at the exact moment a signal occurs.”

This is key.  Also note that there is nothing “magic” about the value -210. Nothing scientific about it. It just seems like a useful cutoff.  Now let’s look at the “Bullish Alert” signals in recent years.  They appear in Figures 1 through 4.

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Figure 1 – Jay’s VixRSIRatio; 2014-2018 (Courtesy AIQ TradingExpert)

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Figure 2 – Jay’s VixRSIRatio; 2010-2013(Courtesy AIQ TradingExpert)

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Figure 3 – Jay’s VixRSIRatio; 2006-2009 (Courtesy AIQ TradingExpert)

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Figure 4 – Jay’s VixRSIRatio; 2001-2005 (Courtesy AIQ TradingExpert)

As you can see in Figures 1 through 4:

a) Readings below -210 tend to be followed by – at the least – decent trading opportunities.

b) Often these readings presage significant market advances

c) And alas, sometimes the signals come too soon and/or are not followed by much of an advance.

The Here and Now

As of 3/23/18 the VixRSIRatio for ticker SPY stood -354.  So clearly “Buy Alert” is at hand.  So the obvious question is “What comes next”?  Will it be a, b, or c above?

As always, time will tell.

Calculations

In a nutshell, VixRSIRatio combines Larry Williams’ Vixfix indicator with Welles Wilder’s 3-day and 14-day RSI indicators to create two more indicators – VixRSI3 and VixRSI14.  We then divide VixRSI3 by VixRSI14 and invert the whole thing (so that we get an indicator that gives negative readings when the market goes down).

Now you see why I put this at the end….

Below is the code for AIQ Expert Design Studio

############## Larry Williams Vixfix #################

xx is 15.

hivalclose is hival([close],22).

vixfix is (((hivalclose-[low])/hivalclose)*100)+50.

############ Welles Wilder RSI 3-day ##############

Define days3 5.

U3 is [close]-val([close],1).

D3 is val([close],1)-[close].

AvgU3 is ExpAvg(iff(U3>0,U3,0),days3).

AvgD3 is ExpAvg(iff(D3>=0,D3,0),days3).

RSI3 is 100-(100/(1+(AvgU3/AvgD3))).

############ Welles Wilder RSI 14-day ##############

Define days14 27.

U14 is [close]-val([close],1).

D14 is val([close],1)-[close].

AvgU14 is ExpAvg(iff(U14>0,U14,0),days14).

AvgD14 is ExpAvg(iff(D14>=0,D14,0),days14).

RSI14 is 100-(100/(1+(AvgU14/AvgD14))).

############Jay’s VixRSIRatio ##############

VixRSI3 is expavg(vixfix,3)/expavg(RSI3,3).

VixRSI14 is expavg(vixfix,3)/expavg(RSI14,3).

VixRSIRatio is -((((VixRSI3/VixRSI14)-1)*100)-50).

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

Biotech + Gold (Updated)

In this article I wrote about an index I follow that combines the biotech sector with the gold stock sector. I also wrote about “one way” to trade that index.  This article builds on that piece and adds a new “rule” to create more trading opportunities.
The BIOGOLD Index
Figure 1 displays the index that I created using AIQ TradingExpert.  It combines ticker FBIOX (Fidelity Select Biotech) with ticker FSAGX (Fidelity Select Gold).
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Figure 1 – Jay’s BIOGOLD Index (Courtesy AIQ TradingExpert)
Also included in the lower clip is an indicator referred to as RSI32, which is the 2-day average of the standard 3-day RSI.
The Old System
In the original article I tested an approach that works as follows using monthly data:
*When the RSI32 drops to 32 or below, buy BOTH FBIOX and FSAGX
*After a buy signal, sell both funds when RSI32 rises to 64 or higher
For results, please see the original article.
The New System
The “new rules” are as follows:
A “buy signal” occurs when either:
*The RSI32 drops to 32 or below
*The RSI32 drops below 50 (but not as low as 32) and then reverses to the upside for one month
After either of the buy signals above occurs, buy BOTH FBIOX and FSAGX
*After a buy signal, sell both funds when RSI32 rises to 64 or higher
Figure 2 displays the BIOGOLD Index with various buy and sell signals marked.
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Figure 2 – Jay’s BIOGOLD Index with RSI32 signals (Courtesy AIQ TradingExpert)
To test results we will:
*Assume that after a buy signal both FBIOX and FSAGX are bought in equal amounts
*We will assume that both funds are held until RSI32 reaches 64 or higher (i.e., there is no stop-loss provision in this test)
For testing purposes we will not assume any interest earned while out of the market, in order to highlight only the performance during active buy signals. Figure 3 displays the hypothetical growth of $1,000 (using monthly total return data) using the “system”.
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Figure 3 – Hypothetical Growth of $1,000 using Jay’s BIOGOLD System (1986-present)
Summary
For the record, I am not “recommending” that anyone go out and initiate trading biotech and gold based on what I have written here.  Before trading using any approach it is essential for a trader to do their own homework and carefully consider all of the pro’s and con’s associated with any specific approach.  For example, while the trade-by-trade results for the above look reasonably good, it should be noted that there have been 4 separate drawdown’s in excess of -19% along the way, including a maximum drawdown of -37% in 2008.  In considering any approach to trading it is essential to first think long and hard about how well one would “weather the storms”, BEFORE focusing on potential profitability.
To put it more succinctly is the simple phrase “Don’t cross the river if you can’t swim the tide.”
Jay Kaeppel
Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

The Biotech-Gold Stock Connection

At first blush there might not seem to be much to connect biotech stocks and gold stocks.
One type of company hires people to engage in high tech biomedical engineering in order to develop potentially life-saving – or at least, life altering – medical breakthroughs…
…while the other hires people to (essentially) dig holes in the ground and mine stuff (granted, valuable stuff, but stuff mined out of the ground nevertheless).
But there is one other connection – stocks of both categories are quite volatile. And that alone may be enough to create a potential opportunity.
The BioGold Index
I created an “index” (such as it is) that combines Fidelity Select Biotech (FBIOX) and Fidelity Select Gold (FSAGX).  The index appears in Figure 1.  Like every other index in the world this index fluctuates up and down.
1Figure 1 – Jay’s BioGold Index (Courtesy AIQ TradingExpert)
The RSI32 Index
The RSI32 Index is simply a 2-day average of the standard 3-day RSI Index.  The code for AIQ TradingExpert EDS is below:
Define days3 5.
U3 is [close]-val([close],1).
D3 is val([close],1)-[close].
AvgU3 is ExpAvg(iff(U3>0,U3,0),days3).
AvgD3 is ExpAvg(iff(D3>=0,D3,0),days3).
RSI3 is 100-(100/(1+(AvgU3/AvgD3))).
RSI32 is simpleavg(RSI3,2).
The RSI32 Index for the BioGold Index appears on the monthly bar chart in Figure 2.
2aFigure 2 – The BioGold Index with RSI32 (drop to 33 or below = BUY) (Courtesy AIQ TradingExpert)
The BioGold “System”
The BioGold System works as follows:
*When the monthly RSI32 Index drops to 33 or lower, buy BOTH FBIOX and FSAGX
*After a “Buy Signal” then when the monthly RSI32 rises to 64 or higher, sell BOTH FBIOX and FSAGX
For testing purposes we will use monthly total return data for both FBIOX and FSAGX from the PEP Database from Callan Associates.
The Results
Figure 3 displays the results of the buy signals generated using the rules above (assumes that both FBIOX and FSAGX are bought after monthly RSI32 drops to 33 or lower and are held until monthly RSI32 rises to 64 or higher.
Buy Signal Sell Signal FBIOX+FSAGX % +(-)
4/30/1992 12/31/1992 +14.4%
2/26/1993 4/30/1993 +14.7%
4/29/1994 9/30/1994 +7.2%
12/30/1994 4/28/1995 +9.8%
4/30/1997 9/30/1997 +18.4%
11/28/1997 4/30/1998 +10.4%
6/30/1998 12/31/1998 +16.1%
3/30/2001 6/29/2001 +22.7%
7/31/2002 12/31/2002 +18.1%
7/30/2004 10/29/2004 +11.2%
3/31/2005 7/29/2005 +10.2%
4/30/2008 7/31/2008 +9.4%
9/30/2008 6/30/2009 +3.8%
5/31/2012 9/28/2012 +20.0%
2/28/2013 2/28/2014 +28.6%
8/31/2015 4/29/2016 +22.2%
12/30/2016 2/28/2017 +13.2%
Average % +14.7%
Median % +14.4%
Std. Deviation % 6.4%
Max % +(-) +28.6%
Min % +(-) +3.8%
Figure 3 – Trade-by-Trade Results
For the record, the “System” has been in FBIOX and FSAGX only 28% of the time (88 months) and out of the market 72% of the time (223 months).
Figure 4 displays the trades in recent years.
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Figure 4 – BioGold System trades; 2012-2017 (Courtesy AIQ TradingExpert)
*The Good News is that all 17 signals since 1992 showed a profit, with an average gain if +14.7%.
*The Bad News is that, a) 17 trades in 25 years is a pretty small number of trades and, b) there are some not insignificant drawdowns along the way (-22.8% in 1998 and -22.4% in 2008, -14.1% in 2013 and -13.6% in 2016).
Still, for what it is worth the monthly equity curve appears in Figure 5.
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Figure 5 – Growth of $1,000 invested using the “BioGold System”; 12/31/1991-12/29/2017
For the record, the “System” has been in FBIOX and FSAGX only 28% of the time (88 months) and out of the market 72% of the time (223 months).
For the record, the “System” has been in FBIOX and FSAGX only 28% of the time (88 months) and out of the market 72% of the time (223 months).  No interest is assumed to be earned while out of the market in the test above.
If we invest in short-term treasuries (1-3 yr.) while not in the stock market we get the results shown in Figure 6.
In Figure 6:
*The blue line represents the growth of $1,000 achieved by holding FBIOX and FSAGX when the BioGold System is on a “buy signal” and 1-3 yr. treasuries the rest of the time.
*The red line represents the growth of $1,000 achieved by buying and holding both FBIOX and FSAGX and then rebalancing at the end of each year.
The “System” grew to $19,863 and the “split” grew to $12,844.
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Figure 6 – Growth of $1,000 using BioGold System plus 1-3 yr. treasuries when out of stocks (blue) versus buying and holding FBIOX and FSAGX and rebalancing each year (red);12/31/1991-12/29/2017
Summary
So is the “BioGold System” really a viable investment idea?  That’s not for me to say.  The per trade returns are pretty good but there aren’t a whole lot of trades and if history is a guide an investor would likely have to ride some significant drawdowns in order to reap the gains.
Still, market-beating performance is market-beating performance, so who knows?
Jay Kaeppel Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro client.
Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

For Every Season, a Sector Fund Portfolio

In this article dated 1/28/16 I wrote about a simple two-fund portfolio that had somehow managed to make money from the end of January to the end of April, 27 years in a row.  OK, make that 28 years in a row.
The portfolio was 50% invested in retail stocks (via ticker FSRPX) and energy services stocks (via ticker FSESX).  As you can see in Table 1 below, FSRPX underperformed most of the major averages but FSESX far outperformed.  As a result, the 50/50 FSRPX/FSESX portfolio gained +12.8% from the end of January to the end of April.
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Figure 1 – Jay’s 2-Fund Portfolio versus Major Market Indexes
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Figure 2 – Tickers FSESX and FSRPX; end of January through April (Courtesy AIQ TradingExpert)
This year’s gain (+12.8%) exceeded the historical average (+10.3%) and historical median (+10.1%).  So chalk one up for the good guys.
Moving on to May
In case you missed it, I also wrote recently about a “May portfolio” here. This portfolio is a bit more defensive in nature and consists of 25% in each of the four funds listed below:
FDFAX – Fidelity Select Consumer Staples
FSHCX – Fidelity Select Health Care Services
FSPHX – Fidelity Select Health Care
FGOVX – Fidelity Government Income Fund
This portfolio has showed a gain during the month of May in 22 of the past 27 years (or 81% of the time).
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client