I believe the Select by Location dialog input names (fields) are a little misleading. I teach college GIS, and I can't tell you how many times students get things reversed, and I believe it's mostly based on confusing terms. See below:
What you are actually "Selecting" goes into the 'Input Features' input instead of the 'Selecting Features' input.
My suggesting would be to have the first dialog input named 'Selecting Features' -- just the opposite.
And, for the 2nd input, I might call this 'Reference Features' or 'Relationship Features' or something!
Thanks,
