Following a brief market pullback, we surveyed all Fidelity technology funds based on their performance during the selloff and their relative performance compared to the broad market indexes to identify the top three sector funds that we think are the most likely to continue to perform well in 2021.
The steep rise of the Treasury note and long-term Treasury bond yields caused a sharp selloff in most equity sectors
Technology experienced the largest decline, but a short-term oversold rally is likely
Natural resources and financials continue to gain, despite the market weakness
A combination of faster than expected economic recovery from the pandemic, new fiscal stimulus, and accommodative monetary policy raised inflation expectations that resulted in a rapid increase in yields (Chart 1).
Higher bond yields also caused a sharp selloff in technology. Chart 2. shows that the technology-focused Nasdaq index is nearing its trend support that increases the likelihood of at least a short-term oversold rally. However, if yields continue to rebound towards the historical levels, the selloff can resume too.
Natural resources, including energy, is the best performing industry group due to expectations of a quick worldwide economic recovery, limited supply increases, and the weakness in the U.S. dollar. Within this group, the Fidelity Select Energy Services (FSESX) is the best performing sector fund (Chart 3).
Financials have also gained in a weak market environment due to the steepening of the yield curve that benefits banks and other sectors in this group. I highlight here the Fidelity Select Banking Fund (FSRBX), as the top performer (Chart 4).
With long-term interest rates rising rapidly and the potential for higher inflation, it is not surprising to see investments in natural resources, such as energy, outperforming the broad market by a wide margin (Chart 1). The declining strength of the U.S. dollar vs. other currencies is also an important contributing factor, since many of the commodities are priced in dollar terms.
Out of the 40 Fidelity Select sector funds, Energy Services (FSESX) is the best performer (Chart 2).
Large integrated oil companies are also benefiting from higher oil prices and renewed interest from investors (Chart 3).
The 5-year chart of the Fidelity Select Natural Resources Fund (FNARX) shows that there is plenty of runway left before reaching the previous high in 2018 (Chart 4). This is in sharp contrast to most equity sector funds, which already surpassed their previous highs.
In a previous article, I highlighted the Fidelity Global Commodity Stock Index Fund (FFGCX) as another excellent mutual fund that allows investing in the natural resources boom. FFGCX continues to make higher highs and higher lows while outperforming the S&P500 index (Chart 5).
The S&P 500 index continued the bullish momentum in the first weeks of 2021 and made a new record high at the end of last week. We are cautiously bullish, as the combination of the rollout of COVID19 vaccinations, expectations for additional fiscal stimulus, and a rebounding economy can continue to fuel the gains. However, in our view, international tensions and the uncertainty around anticipated tax legislation can become headwinds for the equity market.
Steadily rising interest rates caused long-term Treasury bonds to enter a declining trend starting in August 2020. This declining trend continued in January 2021 (Chart 2).
While large-cap technology and other growth investments received most of the attention in recent months, we’d like to note that value stocks have outperformed the large-cap S&P 500 index (Chart 3). We think that this is largely due to money coming out of declining bond investments. In essence, dividend-paying value stocks are taking the place of traditional income-oriented bond funds.
Small-caps are also outperforming large-caps since the lows of the COVID19-related market panic in March 2020 (Chart 4). Since smaller capitalization companies were impacted more severely in the pandemic, a rebounding post-covid economy makes small-cap stocks more attractive, as a group.
We see the declining trend for the U.S. dollar vs. the basket of major currencies continuing, but the weakness will probably depend on the extent and frequency of the fiscal stimulus and changes in monetary policy.
In part due to the weakening dollar and part due to the strengthening global economy, natural resources are in a rising trend. I’d like to highlight here the benchmark West Texas Intermediate Crude (WTIC) oil. WTIC hovered in a broad trading range between August and November of last year but started a steady climb after the first positive news about the COVID19 vaccines became available (Chart 5). We would not be surprised to see natural resources performing well in 2021.
International markets are also providing exciting performance currently with emerging markets leading the way (Chart 7), as economies in Southeast Asia seem to recover faster from the pandemic than the U.S., and Latin American economies benefitting from the natural resources boom.
European markets are starting to lag the S&P 500 index (Chart 8), probably due to a slower pace of the vaccinations, and the short-term economic disruption caused by BREXIT. A notable exceptions are Southern European countries, such as Italy and Greece, which will benefit from increased tourism post-covid.
The comparison of the three-month returns of the 40 Fidelity Select sector funds shows a wide performance gap between the best and the worst sectors:
Investments in natural resources gained the most. The combination of the rollout of COVID19 vaccinations, expectations for additional fiscal stimulus, and a rebounding economy can continue to fuel the gains, in our view. In this group, the Fidelity Select Energy Services Fund (FSESX) is the top performer (Chart 1).
Higher interest rates and the steepening of the yield curve benefitted stocks in financial services. The Fidelity Select Banking Fund (FSRBX) shows the best gain in this group (Chart 2).
The rebound of economic activity, higher savings rates, and anticipated easing of the pandemic related restrictions can further increase consumer spending. Travel and other leisure investments are especially poised for a rebound. We think that the Fidelity Select Consumer Discretionary Fund (FSCPX) is positioned well for a strong performance in 2021 (chart 4).
The weakest sector fund in our survey is the Fidelity Select Gold Fund (FSAGX), as the relative performance of gold stocks vs. the S&P 500 index (shown in the bottom panel of Chart 4) continues to trend lower.
Many investment advisors and asset managers like to incorporate a 3-5% asset allocation for alternative investments in their long-term strategies. In theory, alternative investments can provide uncorrelated returns compared to bonds and stocks, which can reduce portfolio drawdowns and volatility.
Gold, being a scarce metal, has been used since the beginnings of humanity as a store of value and also as a display of wealth in the form of jewelry. Gold is also known as a safe haven investment in times when increased inflation is anticipated by market participants.
While we see merit in the argument that the rapidly increasing national depth coupled with close to zero, or possibly below zero interest rates in the future has the possibility of creating an unexpected jump in inflation, we do not see gold bullion and gold mining stocks rallying right now (Chart 1).
Bitcoin (Chart 2) emerged recently as a pseudo competitor for gold. Proponents of bitcoin say that it disrupts gold. While bitcoin has a scarcity value similar to gold, we think that its main current use is for speculation, not for long-term investment. There are also signs of potential regulatory hurdles ahead in the near future.
In our view, commodities are the most interesting of the alternative asset classes today. Since many of the commodities, such as oil and metals are priced in dollars, the weakening U.S. dollar is creating a tailwind. One of the most interesting Fidelity mutual funds in this space is the Fidelity Commodity Stock Index Fund (FFGCX). The fund invests in stocks of companies engaged in metals, energy, and agriculture industries, and is likely to continue to outperform, in our view (Chart 3).
Following the stock market crash triggered by the COVID19 crisis in March 2020, the U.S. dollar started to decline compared to the basket of major currencies (Chart 1).
The declining dollar makes international investments attractive for U.S. investors. We think that if the dollar continues to decline in 2021, the Fidelity Diversified International Fund (FDIVX) will continue to perform well (Chart 2).
Emerging markets have outperformed developed markets in Europe and the U.S. since the market recovery started in May of 2019. The Fidelity Emerging Markets Fund (FEMKX) has a stellar long-term track record and may be a great way to play the continuation of this trend (Chart 3).
For aggressive investors, the rapid growth of Asian markets can offer an appealing opportunity. Asian markets declined to a lesser extent during the COVID19 market crash than the U.S. market and recovered faster in the aftermath. The chart of the Fidelity Southeast Asia Fund (FSEAX) shows how strong and steady this trend has been (Chart 4).
As a word of caution, we’d like to remind our readers that in our view, global stock markets are highly overbought right now due to the combination of large fiscal stimuli, and dovish monetary policy. Consequently, we anticipate a correction in the near future. However, we think that the trends of relative outperformance by international markets can continue in 2021, and investors will likely have an opportunity to buy at lower prices.
A technical screen of all Fidelity sectors mutual funds shows that only three sector funds were able to make new highs after the late July selloff, while consistently outperforming the S&P 500 index throughout 2019
In our view, these sector funds can continue to outperform in the last three months of 2019, while offering lower investment risks than other sectors
The S&P 500 index was not able to reach a new record high in September after the late July selloff:
To identify the best investment opportunities in the current market environment, we performed a momentum screen of all Fidelity select sector funds using the three-month total return. The screen showed that the Construction & Housing (FSHOX), the Wireless (FWRLX) and the Telecom and Utilities (FIUIX) funds are the leading investments right now:
We found that these sector funds were able to break out to new highs and continue to advance in spite of the recent stock market volatility and fluctuations in interest rates. We think that this trend is due to the continued flow of money into these sectors by risk-averse institutional investors, and will likely continue into early 2020.
Cyclical growth sectors can produce attractive returns when the market sentiment turns bullish. In our view, the Fidelity Select Computers (FDCPX) fund stands out in this category by being able to make a new record high after the July selloff:
U.S. stock market indexes rallied in January after a steep sell-off in late December:
Figure 1. The S&P 500 index partially recovered in January from the steep sell-off that started in October of 2018.
The major drivers for the weakness in equity markets, such as rising interest rates and a trade dispute between the U.S. and China, are still unresolved. Therefore, we think that volatility is likely to continue in Q1 2019.
In our view, the best investment opportunities right now are in emerging markets:
Figure 2. The chart of the Fidelity Emerging Markets Fund (FEMKX) shows a bullish “double bottom” price pattern.
We especially like the Southeast Asia region based on relative performance:
Figure 3. The Fidelity Southeast Asia Fund (FSEAX) shows improving relative performance, as measured by the ratio of FSEAX and the S&P 500 Index (bottom panel).
The S&P 500 index dropped 2.64% yesterday and lost more than 20% of its value compared to the recent peak:
In previous articles, we described that crash-like conditions were developing. In our view, we are witnessing a slow-motion stock market crash that possibly forecasts a global economic slowdown.
Yesterday, the panic selling impacted almost all asset classes, with the exception of gold and Treasury bonds, which are traditionally viewed as “flight to safety” trades.
In our view, the most oversold sectors will likely bounce in the coming days and may offer a short-term buying opportunity to aggressive traders.
To identify the most oversold sectors, we use the Relative Strength Index (RSI) indicator. When the value of the RSI is less than 30, we regard the investment as oversold (denoted with blue circles on the charts). When the RSI is less than 20, the investment becomes highly oversold.
Out of the 11 largest U.S. sectors, the energy, the industrials, the consumer staples, and the financials dropped the most yesterday, while also triggering the highly oversold condition:
The real estate sector is oversold, as well, and we think that this sector also has the potential for a short-term rally:
The broadly followed S&P 500 index continued its slide and it is now below the February low:
The Fed’s comments in combination with rising fears of a global economic slowdown negatively impacted the credit markets, as well. The chart shows that the ratio of the 5-year and 2-year U.S. Treasury notes is below 1 now. This condition is referred to as inversion of the yield curve, which may signal that the risk of a recession is higher than previously thought:
Almost all sectors show a negative performance for the last three months:
Gold miners and utilities are holding up the best:
We think that highly oversold sectors, such as banking and energy services, are ready for a bear market rally:
The S&P 500 index broke below its trading range Friday, which is the latest sign of the deterioration of the U.S. stock market:
Investor pessimism is driven by the slowing growth of the global economy, rising interest rates, trade wars, the Brexit negotiations, and several other geopolitical factors. We think that we are at an inflection point and crash-like conditions can develop quickly.
A worrisome sign for us is the lack of sector leadership. Gold is the only sector that shows a positive return for the last three months:
While the Fidelity Select Gold Fund (FSAGX) has outperformed recently, the chart does not show a bullish price pattern yet. FSAGX will have to break above the long-term trendline to start a new bullish trend:
On the other hand, the chart patterns of the weakest U.S. sectors, such as energy and industrials, are very negative:
In a previous article, we described the turmoil in global markets. European and Emerging Markets continued to deteriorate since then and do not offer investment opportunities at this point in our view:
Both the U.S. and the international markets reacted positively to the outcome of the mid-term elections with all major sectors rallying today. International markets rallied strongly, as well. Investor sentiment turned positive too, while consumer spending remains high. As we wrote previously, we’d like to see a strong December rally that can continue into the first quarter of 2019.
We’d like to highlight the Fidelity Real Estate (FRESX) and the Fidelity Telecom (FSTCX) funds today:
We continue to like the Fidelity Utilities (FSUTX) and the Fidelity Healthcare Providers (FSHCX) funds:
The VIX volatility index (often called the fear indicator) spiked in the last few days, reflecting a deteriorating investor sentiment:
Global markets started out on a good note in the morning, but reversed by the afternoon. One of the few bullish international markets, the Brazilian stock market, broke out of the trading range in the morning due to the election win of an anti-establishment presidential candidate. Unfortunately, the gains turned negative by mid-day and closed below the close of the previous day on high volume. This price pattern is called the bearish outside reversal, not a good sign for Latin American markets.
Argentina and Mexico, the other two large Latin American markets are already in bear market territory:
European markets are also declining steeply. Interestingly, following Angela Merkel’s statement about not seeking re-election as her party’s leader resulted in a small rally in German equities. In spite of that, the stock market of the strongest economy in Europe is clearly in a negative trend:
Another disappointment was the performance of the technology-heavy Nasdaq index. The chart of the Nasdaq 100 tracking ETF (QQQ) shows the same bearish outside reversal pattern:
The large-cap S&P 500 index is also deteriorating and seems to be heading to the February low:
Looking at the relative performance of sectors, the results are unusually negative with only a handful of sectors producing small positive returns over the last three month period:
Perhaps the only sector that is in a reasonable uptrend is utilities, which in our interpretation shows a very defensive investor sentiment:
In our survey, the semiconductors sub-sector is the weakest, and we think that it still has room to fall:
On the other hand, materials, another lagging sector, is highly oversold based on the RSI indicator and could be ready for a short covering rally:
Rising interest rates and hawkish comments by the Fed caused a wave of deleveraging on a global scale. Investors pulled out rapidly from equities to reduce exposure, which caused the benchmark S&P 500 index to drop below its 100-day moving average:
The bear market in international equities, both Europe and emerging markets, accelerated to the downside:
Clearly, smart money is rotating into defensive sectors, while technology, cyclicals, and materials continue to underperform.
From the technical perspective, utilities look the best. The Fidelity Select Utilities Fund (FSUTX) made a new high yesterday, and we would not be surprised to see more investment money flowing into this defensive sector:
The relative strength for the telecom and the healthcare sectors is also positive:
The materials and the semiconductor sectors stand out as the weakest performers in 2018:
The Fidelity Defense and Aerospace Fund (FSDAX) and the Fidelity Select Telecommunications Fund (FSTCX) broke out from their trading ranges to new highs and turned bullish from the technical point of view:
The S&P 500 index continues to climb in September, in spite of worries about multiple potential trade wars:
As we highlighted in June (read article), the strong economy and increased consumer spending favor the consumer cyclical sector. That is why one of our favorite sector investments is the Fidelity Select Consumer Discretionary Fund (FSCPX):
In the last few years, the technology sector was the go-to investment for growth-oriented investors. We just had to buy the dips after sell-offs, and tech stocks would eventually rally again to make new record highs.
The example of Facebook (FB) illustrates why this may be changing as we are heading into the fall season. FB dropped 20% in 15 minutes after the disappointing earnings call in late July. The chart shows that the stock was not able to recover, as investors are shifting towards more conservative and stable investments:
The new market-leading sectors are health care, real estate, utilities and consumer staples:
Changing consumer habits and cord cutting put pressure on earnings for telecommunications companies in the last two years, which resulted in the sector underperforming the market. We think that this may be changing, as telecom companies re-invent their product offerings and investors renew their interest in stable large-cap investments.
We think that the Fidelity Select Telecommunications Fund (FSTCX) is an excellent way to play this emerging trend:
The rapid decline of the Turkish Lira and an unstable geopolitical environment caused an exodus of investment capital from Turkey:
The U.S. dollar continues to appreciate steeply against all major currencies, as investors are buying safe-haven investments denominated in the dollar.
The combination of the weak dollar, a potentially broad trade war and the free fall of the Turkish market has created a bear market in emerging markets around the world:
History tells us that bear markets do not resolve overnight. While an oversold rally is quite possible for emerging market equities, we think that select U.S. sectors offer the best risk-adjusted returns.
A federal judge approved AT&T’s purchase of Time Warner today, which can lead to more consolidation in the industry. We think that this could be a catalyst for this dynamic an innovative sector to catch up with the rest of the market.
The Fidelity Select Multimedia Fund (FBMPX) has lagged most other sector funds in 2018, but we think that it can reverse the downtrend, as investors anticipate more mergers to come in the near future.
Low unemployment and a strong economy are boosting consumer confidence. Not surprising that the market anticipates that consumers will be spending even more on discretionary items, such as entertainment, travel and online shopping.
In our view, the best investment funds to play this trend will continue to be the ones that already perform well. We utilized the sector screen (provided by FidelitySectorReport.com) to identify the best candidates.
Top 3 Fidelity consumer discretionary funds:
The Fidelity Select Consumer Discretionary Fund (FSCPX) provides a diversified investment in the broad sector. We like FSCPX at this point because it is outperforming the S&P 500 index again and the chart also shows a positive technical setup.
The retailing sub-sector is the strongest within the cyclicals sector. The Fidelity Select Retailing Fund (FSRPX) is already at an all-time record level, but we think that it can go higher. Top holdings of FSRPX include leading companies, such as Amazon, Home Depot, Booking, and Netflix.
In our view, a newly emerging investment opportunity is the Fidelity Select Automotive Fund (FSAVX). After five months of consolidation, we think that the technical picture is improving and FSAVX can catch up to the other sub-sectors in the cyclicals sector.
The strongest-performing sector funds today in our momentum screen are related to the financial sector.
Brokers have been beneficiaries of deregulation in the industry and continue to outperform the market:
As traders anticipate an uptick in consumer spending, our new favorite in the financials space is the Fidelity Select Consumer Finance Fund (FSVLX). FSVLX holds investments in credit card companies, banks, and other consumer finance-related companies.
Banks, as a group, are also doing well relative to other market sectors. While interest rates are rising across the board, a potential headwind for this sub-sector is the recently flattening yield curve, which involves short-term interest rates rising faster than long-term interest rates.
Out of the four major U.S. indexes, the small-cap Russell 2000 is the first one to surpass the January high and reach an all-time record level:
We view the relative outperformance of small-cap companies a positive development for the overall market. Small companies are responsible for most of the job creation in America and their strength signals a vibrant and growing economy.
Several large-cap sectors that are not impacted by the stronger dollar and by the rising interest rates are also performing well. Click here for a list of the top-rated industry groups.
Based on our technical screen, we like the Fidelity Small Cap Growth Fund (FCPGX) the most in the current market environment:
One of our long-time favorites, the Fidelity Low Priced Stock Fund (FLPSX) is also performing well:
Real estate stocks have been lagging the market due to concerns about rising interest rates. However, with long-term Treasury yields stabilizing in the 2.95 – 3.20% range, we see a new opportunity to look at the real estate sector.
The chart shows that the Fidelity Real Estate Fund (FRESX) broke out and cleared its 100-day moving average, which we use as an indicator of seasonal trends.
International real estate looks even more attractive, as the long-term bullish trend continues to be in place:
The long-term bullish trend of the Fidelity Real Estate Investment Fund (FIREX) remains intact.
Defense stocks surged on April 7, following the first U.S. strike to punish the Syrian regime. We think that we will likely see a similar response by investors following last night’s airstrike on chemical weapons facilities in Syria.
The Fidelity Select Defense and Aerospace Fund (FSDAX) has outperformed the broad market for more than a year. We anticipate that the strong trend will continue in the wake of allied airstrikes in Syria.
We also think that the increased risk of escalation of the Syrian conflict and the potential for disruption of oil production could lead to higher oil prices and the continuation of the bullish rally for energy stocks.
The price of the West-Texas Intermediate Crude Oil (WTIC) could reach the $70 per barrel mark next week in response to increased geopolitical risks.
The energy sector experienced a 20% correction at the beginning of 2018 but seems to be recovering again in response to higher oil prices. The Fidelity Select Energy Fund (FSENX) could be a great way to play this trend.
The stock market started the second quarter with heavy selling. The S&P 500 index dropped by more than 2%:
Technology and consumer discretionary stocks led the sell-off, including Intel (down -6.07%), Amazon (down -5.21%), Netflix (down -5.10%) and Facebook (down -2.75%).
Not surprisingly, mutual funds with large holdings in these names declined the most today:
Investors were selling other high-risk assets too, such as biotechnology shares:
With the dollar no longer falling versus the major currencies, international investments in Europe and Asia are becoming less attractive, as well:
Remarkably, all sector funds closed down today. In our view, this rare occurrence may signal a significant shift in investor sentiment towards a more bearish stance.
The momentum rankings of Fidelity sector funds show that the defense sector and some sub-sectors of technology are the strongest relative to other sectors:
Furthermore, the charts below show that both the Fidelity Select Defense and Aerospace Fund (FSDAX) and the Fidelity Select IT Services Fund (FBSOX) stayed above their respective 100-day moving average.
We use the 100-day moving average to assess the direction of seasonal, or intermediate-term, trends. The only other Fidelity sector fund that is above its 100-day moving average is the Fidelity Select Utilities Fund (FSUTX):
Overall, in our assessment, most sectors that make up the U.S. stock market are turning bearish in the short to intermediate-term timeframe, which could lead to further downside risk.
After the unexpected correction last week, the U.S. equity market rallied back in the last three days, in spite of fears of rising interest rates and inflation:
Based on the three-month total return, which is a measure of price momentum, the consumer cyclicals (such as retail), industrials (such as defense) and the financials (such as banking) sectors led the market higher:
We continue to like the technology sector, as well. In fact, the only sector fund that made a new all-time high today is the Fidelity Select Communications Equipment Fund (FSDCX), which represents a sub-sector of the broader technology sector:
The sell-off was triggered by rising interest rates, fears of rising inflation, and the potential of a more aggressive monetary policy by the Federal Reserve.
A worrisome sign for the stock market is that shorter-term interest rates are rising faster than long-term rates, which could lead to yield curve inversion, a condition where short-term rates are higher than long-term interest rates. The bottom panel of Chart 2. shows the ratio of the 10-year vs. 30-year yield indexes. The ratio line is steadily rising since last July, as denoted by the blue arrow:
Rising interest rates negatively impacted funds that invest in this space:
The stock market sell-off is uneven with some sectors falling faster than others. Currently, the spread of the total return between the best and the worst sectors over the last three months is 25%. Should the market continue to drop, we think that this spread will continue to widen. Conversely, if we see a relief rally by mid next week, the spread will probably become more narrow.
The industry groups with the strongest relative strength vs. the S&P 500 index are the cyclicals (consumer discretionary), financials and industrials. We’d like to highlight financial services and defense stocks (part of the industrials group) as two sectors that can potentially lead the market once the market correction ends.
We continue to like the technology sector, as well, because of its lesser dependence on changes in interest rates and because of the proliferation of disruptive technologies from robotics to intelligent software:
The Fidelity Select Industrial Equipment Fund experienced a large drop of its net asset value (NAV) on Tuesday. The explanation is that yesterday was the ex-dividend date for this fund and the $5.542 per share dividend was paid out:
While technology, industrials, and cyclicals were the strongest sectors in 2017, we think that it may make sense to diversify into additional areas, such as the health care sector, to protect against the potential of increased volatility in 2018.
Currently, the Fidelity Select Medical Delivery Fund (FSHCX) is the strongest fund in this sector based on its three-month total return. FSHCX holds investments in health care insurance and service companies.
In our view, another excellent investment fund is the Fidelity Select Medical Technology and Devices Portfolio (FSMEX), which primarily invests in companies that manufacture medical equipment and surgical devices. The chart shows that the price consolidated in the last 6 months, however, the current rally can lead to a new breakout, which will likely lead to increased rotation into this sector:
2018 started on a good note for equity investors. After the first few days of trading, the Nasdaq index moved above the 7,000 level, while the Dow Jones Industrial Average surpassed the psychologically important 25,000 level.
The market rally is broad-based, which allows investors to diversify across of multiple sectors. Looking at the three-month total returns, the energy, the natural resources and the retailing sectors lead the market right now:
However, as shown on the chart of the Fidelity Select Energy Fund (FSENX), the RSI indicator signals an overbought condition, which is often followed by a sell-off:
We think that instead of chasing the current market leaders, investors may consider overweighting the financials sector. One of our favorite funds in this space if the Fidelity Select Financial Services Fund (FIDSX). The price consolidated in December, but the long-term uptrend was not interrupted. FIDSX is now showing signs of starting a new upleg, which we think can provide an optimal entry point for overweighting an existing position or starting a new position in this sector: