How can an Aggressive Growth Strategy Beat the Market in 2015

February 18, 2015

Summary:

  • Global equity markets are “climbing a wall of worry”, in spite of uncertainty about the potential exit by Greece from the Eurozone and geopolitical events in the Ukraine, in the Middle-East and in Latin America.
  • Quantitative easing by the European Central Bank and the Bank of Japan can lead to inflation of financial assets in 2015
  • Low interest rates and much reduced energy costs have started to fuel a new boom in consumer spending in the U. S.
  • The best growth strategy this year may be to diversify between market-leading sectors and emerging investment areas (source: FidelitySignal.com)

Broad market indexes, such as the S&P 500, the Dow Industrial Average and the Nasdaq, are making higher highs again after a treacherously volatile two-month period starting in early December. The good news is that investors have not shied away from risk-on investments, which is very bullish.

The FidelitySignal Aggressive Growth model portfolio can provide an example of how an aggressive asset allocation strategy can work in the current market environment. The asset allocation mix of the portfolio consists of five Fidelity mutual funds. The funds represent investments in both leading sectors and emerging investment areas:

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The FidelitySignal Aggressive Growth model portfolio currently holds positions in market-leading sectors, such as medical delivery, construction and housing, and consumer staples:

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One of the exiting new investment opportunities is materials/chemicals. This sector should continue to benefit from low oil prices and increased demand:

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Southeast Asian economies with strong ties to the Euro market can be great beneficiaries of improved condition in the Euro zone:

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Additional investment strategies are available at FidelitySignal.com

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Stock Market is at All Time High Again; New Investment Opportunities Emerge

February 14, 2015

The chart of the Fidelity Spartan U.S. Equity Index Fund (FUSEX) shows that U.S. equities broke out from a volatile trading range that started in early December of last year. At the same time, the yield of Treasury bonds reversed course, which caused the Spartan Long-Term Treasury Bond Fund (FLBIX) to correct:

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Mutual funds investing in the leading sectors have continued to advance this year, but may be ripe for a pullback now to their respective moving averages (blue lines on the charts):

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As the equity market has turned more bullish again, sector rotation has intensified, as well. This is good news for investors, since new investment opportunities are emerging. One example is the Fidelity Select Materials Fund (FSDPX):

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Read more about investment strategies involving these funds at FidelitySignal.com

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Sector Rotation: Declining Oil Price Boosts Retailing and Automotive Stocks

February 5, 2015

The price of energy-related commodities, such as light crude oil, experienced a sharp short-covering rally at the beginning of the week, but the downtrend appears to be resuming again:

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As consumers save money at the gas pump, they have more disposable income to spend at the shopping mall or to purchase merchandise online, which boosted the earnings prospects of companies in the retailing sector. The Fidelity Select Retailing Fund (FSRPX) is an excellent way to take advantage of this trend:

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Car company stocks also responded positively to declining energy prices. Should this trend continue into the summer months, the strategy of overweighting the Fidelity Select Automotive Fund (FSAVX) and underweighting energy stocks may offer the most optimal portfolio allocation approach:

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Read more about investment strategies at FidelitySignal.com

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Is it Time for the Contrarian Bet?

February 2, 2015

Summary

  • The direction of the financial markets have not really changed that much since late last year, but volatility for U.S. equities is much higher
  • In our view, the risk/reward ratio of taking contrarian investment bets is not favorable right now, but that can change rapidly in the near future
  • A select few sectors are still in a bullish uptrend
  • This is a very dangerous market where increasing the cash allocation seems to be the prudent choice. Sudden and violent moves can happen rapidly in the currency, commodity, equity and bond markets.

Often, the weakest investments from last year can turn out to be the best performers in the next. Since international markets and sectors related to natural resources have fallen tremendously in 2014, it is tempting to take contrarian bets right now and hope to be able to buy close to the bottom. However, whether we like or not, timing can be critical and jumping into a declining investment can have a devastating effect on an otherwise well-balanced portfolio.

When volatility is increasing, it is always useful to take a longer-term view of the direction of the key asset classes. As we can see from the two-year charts below, long-term Treasury bonds are still declining, the dollar is still advancing against a basket of major currencies, and commodities, such as crude oil, are still falling.

Perhaps the most striking feature of these charts is the steepness of the curves. While it is tempting to believe that the direction of the trends is about to reverse in a big way, the reversals have not happened yet, and we simply cannot know if the next rally/sell off will be temporary, or, if it will mark a turn of the long-term trend.

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While the long-term trends for the other three asset classes have not changed yet, U.S. equities have started experiencing increased volatility since November 2014, and now are locked in a trading range. The long-term trend is still up, but the U.S. stock market is on the cusp of rolling over.

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Is it time to buy beaten down stock sectors, such as commodities or gold, or jump into Latin American equities? We think that the risks are too high right now, but would not be surprised to see these investments outperforming the market at one point in the future.

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The Wall Street adage says that there is always a bull market somewhere.  The charts below show a sampling of Fidelity income and equity funds that have done exceptionally well in the recent period, and may continue to outperform:

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Read more about investment strategies at FidelitySignal.com

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Avoid European Stocks Until the Euro Stops Falling

January 29, 2015

On January 22nd, the European Central Bank announced the start of its Quantitative Easing (QE) program that will involve a larger than expected 60 billion Euro asset purchase per month. The Fidelity Europe Fund (FIEUX) responded with a rally, but it has not yet cleared the resistance level (see blue line on the chart):

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At the same time, the Euro continued to drop against the dollar, which explains why European stocks are less attractive in U.S. Dollar terms:

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The picture is completely different if we look at European equities in Euro terms. This chart shows a very bullish break out:

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Read more about investment strategies at FidelitySignal.com

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New Investment Opportunity in High-Yield Corporate Bonds?

January 29, 2015

Corporate bonds have experienced a volatile period since August of 2014, but the renewed demand for income producing investments and the strengthening of the U.S. economy makes high yield corporate bonds attractive again.

The Fidelity Capital and Income Fund (FAGIX) provides a great way to play this new trend. FAGIX, in spite of its name, is a high yield bond fund. The fund managers use a rigorous fundamental analysis to select investments. The chart shows that FAGIX broke out from a consolidation period, which lasted for six months. In our view, the 4.18% dividend, the potential for capital appreciation and the five star rating by Morningstar makes FAGIX an appealing investment choice.

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Read more about investment strategies involving the FAGIX fund at FidelitySignal.com

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Long-Term Bullish Trend is Intact for U.S. Equities, in spite of Increased Volatility; Gold Forms a Bullish Double-Bottom Chart Pattern; It is Still Early to Invest in the Energy Sector or in International Equities;

January 18, 2015

It is always good to take a look at long-term trends when short-term volatility increases, in order to have a better sense of the market direction. While the widely anticipated stock market correction remains a possibility, in our view, the long-term bullish trend for U.S. equities is still intact.

The chart shows that the multi-year uptrend for the benchmark Fidelity Spartan U.S. Equity Index Fund (FUSEX) has not yet been interrupted by the recent market volatility:

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In a recent article (see Best Fidelity Mutual Funds for 2015) we highlighted the most attractive investments for 2015. The selected mutual funds have continued to perform well in the last few weeks of trading. Especially, conservative sectors, such as real estate, utilities, medical equipment and consumer staples have outperformed the S&P 500 index:

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Perhaps, the most interesting new development in 2015 is the renewed interest in buying gold mining stocks. The chart of the Fidelity Select Gold Fund (FSAGX) below shows a short-term bullish double bottom pattern and increased buying activity during the first two weeks of the New Year. However, gold has a long way to go before it can establish a long-term uptrend.

While gold is traditionally viewed as an inflation hedge, in the current deflationary environment precious metals are looked at as an alternate asset class that can potentially serve as a volatility hedge. We’d like to caution investors, that while gold can provide returns that have low correlation with equities, this sector is highly speculative and is more appropriate for the purposes of short-term trading than long-term investing.

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As noted in earlier articles, we believe that it is still too early to diversify into the weakest sectors, such as natural resources (in particular energy), and into underperforming international markets.

The blue lines on the charts of the Fidelity Select Energy Fund (FSENX) and the Fidelity Latin America Fund (FLATX) indicate that the bearish downtrends that are still in place:

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Read more about investment strategies involving these funds at FidelitySignal.com

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