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Sector Funds

THE WILLIAMS' SECTOR STRENGTH STRATEGY 2020

Fidelity Select Technology (FSPTX)

In evaluating a fund's ability to be considered as the Williams' Sector Strength Strategy selection for 2020, all Fidelity Select Funds were evaluated based on the previous two-years' performance. i.e, the fund must be below the top-funds line of the year before last year, (2018) test 1, and 50% or more of the funds above the top fund line last year (2018) must be from a different sector than the fund being evaluated, test 2.

Fidelity Select Semiconductors (FSELX) was the top-performing sector for 2019. Cutting-edge chipmakers stand out as the bestperforming industry across sectors and regions. The industry became the backbone of the economy through the prevalence of internet-connected devices and the emergence of cloud storage networks.

The sector is likely to see more upside in 2020, but currently this sector is severely overbought. In fact, it is the best performing sector over the last five years and soared 377% in the past 10 years,

more than doubling the S&P 500s 182% climb. However, FSELX is also the most volatile sector of technology sector; if we see a correction in 2020 the fund could be down sharply. In fact, in even through its epic run last year, the fund corrected more than 20% on three different occasions.

After a potentially weaker start to this year due to tax selling, EIS feels the overall technology sector should finish the year higher. A better way to play this sector would be to buy Fidelity Select Technology (FSPTX). This sector is also is showing some signs of being overbought with its top two holdings being Apple and Microsoft, however, the fund has holdings in other areas such as technology based commerce, computer software and communication services. This fund was the second best performing sector for 2019 and it had only one decline of 10% last year.

There are a number of ETFs that mimic this sector, Select Sector

Copyright ? 1997 Educational Investor Services. All rights reserved

SPDR Technology (XLK) and Vanguard Information Technology (VGT) would be acceptable choices. Although ETFs can now be purchased commission free, can be traded daily and have lower expense ratios than Fidelity Select Funds, most ETFs are index funds

of the sector they represent, buying the entire sector, while Fidelity Select Funds are managed, trying to own the best stocks that make up the index. This is the reason we why we recommend Fidelity Select Fund over most ETFs.

THE WILLIAMS' DIVERSIFIED SECTOR STRENGTH STRATEGY 2020

40% 20%

20% 20%

Fidelity Select Technology (FSPTX) Fidelity Select Construction & Housing (FSHOX) Fidelity Select Banking (FSRBX) Fidelity Select Energy Services (FSESX)

The Third best performing Fidelity Select Fund in 2019 was Fidelity Select IT Services (FBSOX). This fund is from the same sector as FSPTX and for that reason it is eliminated as a candidate for 2020.

The next best performing Fidelity Select Fund during 2019 was Fidelity Select Construction & Housing (FSHOX). This fund was below the top fund line in 2018 so it passes test one. It's is the only Fidelity Select Fund that represents Construction and

Housing Sector, therefore FSHOX passes test 2 by default.

This fund struggled during November and the first half of December. Treasury Notes rose sharply as news of a China Phase One trade deal was close, and the REITs held in this fund declined on these rate increases.

In addition, Home Depot (HD) the fund's largest holding, making up 20%of total holdings, missed earnings and lowered its forward guidance. The stock declined 10% when these results were released.

Copyright ? 1997 Educational Investor Services. All rights reserved

As we close out the year, the Phase-One China trade deal, which looks under-whelming, is likely to be signed on January 15th and a Phase Two deal is not expected, if ever, until after the election.

In addition, after the December Fed meeting it's evident that Fed rate cuts have stopped; however, a high degree of assurance was given that rate hikes are likely off the table until later in the year. Treasury Notes declined on this news causing REITs to rally, and they were among the topperforming sectors during the last week of the year.

Inflation and a sizzling economy may be giving the Fed thoughts on a rate hike, however, the Fed usually refrains from making policy changes the closer we get to an election.

With HD and REITs rallying at year's end, but still at lower levels than at the beginning of the 4th quarter, this is one of the few sectors that is not overvalued after the current market's epic gains.

As long as interest rates for the 10year Treasury remains below 2.0%, this sector will do well next year. FSHOX is the second select fund choice for 2020.

For those looking for a similar ETF, SPDR S&P Homebuilders (XHB) would be an acceptable fund.

The next fund on last year's top performing list is Fidelity Select Wireless (FWRLX). Although Fidelity considers this a communication fund, in reality this fund mirrors the technology sector. Its top holding is Apple and it also has top 10 holdings in Google and Qualcom. These stocks are also in the top 10 holdings of FSPTX.

Similarly, the next-in-line Fidelity Select Computers (FDCPX) and Fidelity Select Software and IT Services (FSCSX) come from the technology sector and therefore are also eliminated.

Fidelity Select Biotechnology (FBIOX) sometimes rallies with healthcare sector while other time it rallies with the technology sector. This year the fund is rallying with the technology sector so it's also eliminated. It also carries the risk of a do-nothing Congress passing a drug or medical transparency legislation or that a socialist becomes the frontrunner for the Democratic Party.

The next Fidelity Select Fund is Fidelity Select Banking (FSRBX). This fund has been an under-

Copyright ? 1997 Educational Investor Services. All rights reserved

performer since the 2008 financial crisis.

In 2018 FSRBX tumbled nearly 20%, while the S&P 500 was down only 4.6%. This year FSRBX is up 35% outperforming the market by about 5%.

The rally in bank stocks should persist into 2020 riding on multiple tailwinds, including a strong economic backdrop, increased merger and acquisition activities, and a supportive regulatory environment.

The good news for banks is that they make money from charging interest on loans. A stronger economy means more companies and individuals are likely to borrow from banks to invest or make purchases. A steepening yield curve means banks can charge more from long-term loans than they pay for short-term debt, and the wider gap between the two rates would boost their margins.

Bank stocks might also be lifted by more mergers and acquisitions in the coming year. In 2019, BB&T merged with SunTrust to form Trist Financial Corporation, the sixth largest bank in the U.S. Most analysts expect to see more deals like this this year as other large banks look for ways to drive scale and profitability higher.

Banks stocks always come with caveats; Predatory loans and related practices have haunted the banks for years. By no means is this mess cleaned up; however, it is a much smaller issue than it was in recent years.

A surprise recession could result in a sudden drop of equity prices. If inflation is rising faster than expected and the Federal Reserve becomes worried about an overheating economy, the central bank could also increase interest rates again, which would negatively affect the net interest margins of banks and bite into their revenues.

Nevertheless, Fidelity Select Regional Banks (FSRBX) is third select fund choice. Suitable ETFs for this fund is KBE.

Members may remember that last year at this time the oil drilling sector was the worst performing sector in 2018. We also went through the analysis that over the last 40 years when the oil sector does poorly with a year that ends in 8 (1988,1998,2008, 2018) it rallies the next year ending in 9. At the beginning of 2019, Fidelity Select Energy Service (FSESX) rallied 20% during the first two months only to reverse its direction and give back those gains until it was trading at a 52-week low in mid-October. Since that

Copyright ? 1997 Educational Investor Services. All rights reserved

date oil has finally got a bid. FSESX has rallied 15% from that date. EIS feels this sector still has some more room to rally, and maybe last year we were just a little early to this trade.

There are a couple of catalysts driving up the crude oil prices recently: trade optimism, a large drop in U.S. commercial stockpiles, a plunge in the US Dollar and air strikes in the Middle East.

China's Commerce Ministry stated on Sunday that it is keeping in close touch with the U.S. on the signing of a long-awaited trade deal on January 15th.

Oil prices were also supported by a larger than expected fall in U.S. crude stocks. U.S. stockpiles fell by 5.5 million barrels in the week of Dec. 20, far exceeding a 1.7million-barrel drop prediction.

Unrest in the Middle East also has traders keeping a watch on markets. Protesters on Saturday also forced the closure of Iraq's southern Nassiriya oilfield, while the U.S. carried out air strikes on Sunday in Iraq and Syria against the Kataib Hezbollah, an Iranbacked militia group. Traders are keeping an eye on the smoldering powder keg in Iraq, OPEC's second large producer.

As a result, Fidelity Select Energy Services (FSESX) will also be added as a sector fund choice. OIH or XLE would be suitable ETF alternatives.

Although the Williams' sector fund strategies put up positive numbers last year, over the last five years the sector fund strategy has lost some of its luster.

As result EIS did a deep dive into a sector performance with hope to bring better gains in the future.

With more accessibility of investment information and the explosion of Exchange Traded Funds (ETFs), investing in sectors is no longer an unknown practice. Buying the best performing sectors are becoming readily known and investors often flock to these sectors short-term. However, with that said, the best performing strategy over the last 30 years is to use the Williams' Sector Strategy or Diversified Strategy and buy the sectors that meet the criteria and hold them for the entire year. The only time they should be sold inside a year is if they hit parachute levels, a 10% decline from your initial investment. Economic conditions that affect the sector should not affect the selling of the sector unless it hits its parachute levels.

Copyright ? 1997 Educational Investor Services. All rights reserved

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