The Federal Reserve said in a statement today that it will wind down its bond purchasing program in October, but will continue to aim at keeping interest rates low for a considerable time. Initially, equity markets reacted positively to the news, but the rally faded by the close of the market session.
From the technical standpoint, the most interesting development was the Dow Jones Industrial Average hitting a new all-time high at 17,156, while the other major indexes were not able to follow through. Small cap stocks, which typically lead the market in the early phases of a growth cycle, are the weakest right now.
As money rotates into large-cap blue chip stocks, the Fidelity Large Cap Growth Enhanced Index Fund (FLGEX) may be one of the best ways to put fresh money to work in the current market environment:
Unlike what we have seen during previous market rallies earlier this year, not all sectors show positive momentum right now. Consequently, as we head into the seasonally weak October period, investors will have to be increasingly more selective. The technology and health care sectors show the strongest relative strength right now and barely corrected during the recent sell off. Here are two Fidelity funds that investors can consider using to overweight positions in these two large sectors:
While the Fed’s intention is to keep interest rates low, the yield on the long-term Treasury bond has started rising already and broke its long-term trend today:
As the result, the bond market sold off and most Fidelity bond funds retreated, as well. Should interest rates continue to climb, bond fund investors will be faced with a difficult situation: the Net Asset Value (price) of their funds can decrease, while they will still be liable for paying taxes on the dividends distributed by the funds. This situation may force more selling of bond funds, which can create a negative feedback cycle for the bond market. The trend reversal for the following two widely held Fidelity bond funds show the potential danger bond investors will face in a rising interest rate environment:
Buy and sell signals for Fidelity funds are available at FidelitySignal.com