A Bullish Case for the Market: The Strongest Sectors are Getting Stronger

Summary

  • While the S&P500 index pulled back in the last six weeks, the leading sectors continue to advance.
  • We expect to see additional trading opportunities in the next few weeks in the technology, utilities, cyclicals, consumer staples, and industrials groups.
  • Our technical screen shows that real estate and health care can also strengthen.
  • It is best to avoid weak sectors that continue to weaken, such as energy and financials.

 

The benchmark S&P 500 index pulled back from its all-time record since early March, but volatility stayed low in spite of geopolitical uncertainties in Syria and on the Korean peninsula. In our view, any improvement in the outlook for tax or regulatory reform in Washington can serve as a catalyst to spark a broad-based stock market rally.

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In the section below we review the strongest industry groups that we think are worth watching closely in the next few weeks.

Technology: The strongest sector fund in this group is the Fidelity Select Technology Fund (FSPTX). FSPTX has been one of the best performing Fidelity funds in the last 12 months and it continues to advance:

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Utilities: The Fidelity Utilities Fund (FSUTX) is regarded as a conservative investment, but has appreciated in price considerably due to interest rates trending lower:

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Cyclicals: Economists usually rejoice when consumers increase their spending on goods and services since it shows that the economy is on a strong footing. One of our favorite investments in this space is the Fidelity Select Leisure Fund (FDLSX). FDLSX has turned from a market performer to an outperformer in the last two weeks and the technicals continue to be very bullish:

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Industrials: We highlight only the Fidelity Select Defense and Aerospace Fund (FSDAX) here as one of the top investments in this space, but we think that the whole industrials group can be interesting going forward.

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Consumer staples: Another conservative investment and can generate solid returns:

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Weak sectors, which are underperforming the broader market include the Energy and the Financials groups. Here we show two examples, the Fidelity Select Energy Services Fund (FSESX) and the Fidelity Select Banking Fund (FSRBX). Both funds are below their respective 100-day moving averages and show a negative price pattern:

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Sector Rotation: Conservative Investments are Outperforming

The S&P 500 index closed lower again today, but in our view, we are experiencing only a small correction so far:

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The most important new development is the directional change of the long-term Treasury bonds yield index:

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Lower interest rates and the flight to safe investments due to geopolitical risks are two factors that contribute to utilities outperforming most sectors:

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Consumer staples, another defensive sector, is also making higher highs and higher lows:

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The weakest sectors that investors should consider avoiding in the current market environment are energy, transportation and financials, especially banking:

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Geopolitical Risks May Cause Flight to Safe Haven Investments

Increased tensions on the Korean peninsula and in Syria can adversely impact the already weakening stock market really.

In our view, an early warning sign is the sudden outperformance of safe haven investments, such as Treasury bonds and gold.

The chart below shows that the Spartan Long-Term Bond Fund (FLBIX) started moving higher already by breaking out from a six-month trading range:

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The Fidelity Select Gold Fund (FSAGX) was the best-performing Fidelity fund today with a 2.63% gain, and may be on the verge of breaking the long-term downtrend line:

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Large Price Drops of Some Fidelity Select Funds are Due to Capital Gains Distributions

Several Fidelity sector funds experienced large drops in their net asset values (NAVs) on Friday. The explanation is that Friday was the ex-dividend date for these funds.

For investors who chose to reinvest the distributions automatically, the value of their holdings will be readjusted on Monday. For investors who chose not to reinvest, their investment account will be credited with the distribution amount.

Here are a few examples of sector funds experiencing large price drops:

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The simplest way to double check recent distributions is by going to the Fidelity.com website directly. For example, here are the most recent capital gains distributions for the Fidelity Select Automotive Fund (FSAVX):

FSAVX_Fees_and_Distributions_-_Fidelity_®_Select_Automotive_Portfolio___Fidelity_Investments

Link: https://fundresearch.fidelity.com/mutual-funds/fees-and-prices/316390699

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Best Income Funds for 2017

Improving U.S. economic conditions and the strengthening of the dollar resulted in higher interest rates in the last six months. The yield on the long-term Treasury bonds is slightly above 3% now:

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As the consequence, bond funds investing in Treasuries did not perform well in the same period:

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On the other hand, investors who were willing to take higher risks in search for higher income have been well rewarded.

For example, the Fidelity High Income Fund (SPHIX) invests in corporate bonds and it offers both a respectable 5.28% yield and the potential for strong appreciation of its Net Asset Value, should the U.S. economy continue to grow in 2017:

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Another example is the Fidelity Real Estate Income Fund (FRIFX) with a current yield of 4.16%:

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Investors who are interested in diversifying into international assets can also consider the Fidelity New Markets Income Fund (FNMIX) with a current yield of 5.42%. FNMIX holds the majority of its assets in debt securities of emerging market companies.

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Conservative Investments Lead the Market in 2016

After high market volatility in 2015, it is not surprising to see that investors are favoring conservative investments in 2016. We’d like to highlight here a trio of conservative sector funds, which show improving relative strength compared to the S&P 500 index.

The Fidelity Select Utilities Fund (FSUTX) returned an impressive 14.5% in the last three months, surpassing the 2.77% return by the benchmark Fidelity Spartan 500 Index Fund (FUSEX) in the same period:

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The Fidelity Select Telecomm Fund (FSTCX) is at a new all-time high level and returned 10.17% in the last three months:

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The Fidelity Select Consumer Staples Fund (FDFAX) reached an all-time high too, and returned 6.32% in the last three months:

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Read more about investment strategies at FidelitySignal.com.

 

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Real Estate Funds at All-Time High Levels

A stealth rally is under way in real estate equity and income investments, while most of the financial media is focused on developments around oil and other natural resources.

The Fidelity Real Estate Portfolio Fund (FRESX) is now at a new all-time high level surpassing the previous high reached in January of 2015:

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Our favorite investment in this space is the Fidelity Real Estate Income Fund (FRIFX) that is also at a new all-time high:

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Read more about investment strategies at FidelitySignal.com.

 

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