Why Diversify your Portfolio in 2018?

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.

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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:
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View model portfolios at FidelitySignal.com for more information.

 

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Sector Rotation: Technology at Record High; Multiple Sectors Advance

Treasury bonds sold off last week due to a sudden spike in interest rates:

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Initially, the stock market reacted negatively to the Treasury bond sell-off, but strong earnings by technology companies, such as Amazon, re-ignited the stock market rally.

The technology sector is the strongest performer right now, but the market rally is broad-based, which we think is long-term bullish for equities. Other sectors with strong momentum include materials, cyclicals, industrials, and financials.

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We’d like to highlight here the three leading investment funds in our survey of Fidelity sector funds, the Fidelity Select Semiconductors (technology), Fidelity Select Chemicals (materials) and the Fidelity Select Automotive (cyclicals) funds.

The charts show that the bull market advanced with virtually no interruption over the last 12 months. We think that the recent excitement about tax reform in Washington is not fully priced in yet, consequently, these investments representing the three leading sectors can continue to advance through December of this year.

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So far in 2017 investors favored high risk, high reward investments, and have been “buying on the dip”. To illustrate, we show here the charts of the Fidelity Select Defense and Aerospace (industrials sector) and the Fidelity Select Financial Services (financials sector) funds.

The arrows indicate opportunities for purchasing these investment funds after pullbacks:

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The energy, telecom, and consumer staples sectors continue to lag the market. The weakest investment in our survey is the Fidelity Select Multimedia fund that primarily invests in cable companies and content providers:

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Visit fund ratings at FidelitySectorReport.com for more information.

 

Top 5 Sector Funds after the Market Sell-off

The U.S. stock market partially recovered in the last two days from the worst sell-off of the year. The sell-off was caused by turmoil in Washington, which centered around accusations of president Trump obstructing justice.

The chart below shows that the sharp drop of the S&P 500 index occurred on high volume, which was the reflection of panic amongst disoriented investors:

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After the rebound, the weakest sectors, which include energy, banking, and transportation, continued to stay weak. On the other hand, the strongest sectors were not impacted much:

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We used the technical screen provided by Fidelity Sector Report to identify the safest sectors to invest in after the market sell-off.

The criteria for the screen included strong long-term and short-term price trends, and improving relative strength compared to the S&P 500 index.

The top 5 sector funds are:

  • Fidelity Select Technology Fund (FSPTX)
  • Fidelity Select Leisure Fund (FDLSX)
  • Fidelity Select Wireless Communications Fund (FWRLX)
  • Fidelity Select Environments Services Fund (FSLEX)
  • Fidelity Select Consumer Staples Fund (FSDAX)

Here are the charts for the top sector funds:

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Consumer Cyclicals are Hot Again; Why are Retailers Attracting Long-Term Investors

In a previous blog post we wrote about the strong performance of the consumer discretionary (cyclicals) sector:

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Chart 1. The Fidelity Select Consumer Discretionary Fund (FSCPX) performs strongly in 2017

On the other hand, it seems to be important this year to select the right sub-sector within the large cyclicals group. For example, as we observed earlier,  media stocks turned negative, while the leisure sub-sector has turned red-hot.

A third investment choice to consider is the retail sub-sector, which is often overlooked due to recent weak earnings and store closures by brick-and-mortar retailers, such as Macy’s.

We argue here that while online retailers, such as Amazon, have gained market share, consumer spending overall continued to be strong. That’s why we like the Fidelity Select Retailing Fund (FSRPX):

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Chart2. The Fidelity Select Retailing Fund (FSRPX) performs strongly in 2017, in part due to investing in both online and brick-and-mortar retailers.

Looking at the long-term picture makes it even more compelling to invest in the retail sub-sector:

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Chart 3. The five-year chart of the Fidelity Select Retailing Fund (FSRPX) shows that a long-term bet on increasing consumer spending has worked very well.

 

Click here to see the best and worst sector funds. The ratings are provided by FidelitySectorReport.com.

 

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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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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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