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:
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:
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:
In a previous blog post we wrote about the strong performance of the consumer discretionary (cyclicals) sector:
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):
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:
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.
- 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.
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:
Utilities: The Fidelity Utilities Fund (FSUTX) is regarded as a conservative investment, but has appreciated in price considerably due to interest rates trending lower:
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:
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.
Consumer staples: Another conservative investment and can generate solid returns:
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:
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:
As the consequence, bond funds investing in Treasuries did not perform well in the same period:
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:
Another example is the Fidelity Real Estate Income Fund (FRIFX) with a current yield of 4.16%:
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.
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:
The Fidelity Select Telecomm Fund (FSTCX) is at a new all-time high level and returned 10.17% in the last three months:
The Fidelity Select Consumer Staples Fund (FDFAX) reached an all-time high too, and returned 6.32% in the last three months:
Read more about investment strategies at FidelitySignal.com.
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:
Our favorite investment in this space is the Fidelity Real Estate Income Fund (FRIFX) that is also at a new all-time high:
Read more about investment strategies at FidelitySignal.com.
- A technical screen of Fidelity mutual funds shows that new investment areas emerged in 2015 to lead the market
- The natural resources sector, which includes energy, has the potential to provide market-beating returns. On the other hand, investors shouldn’t expect low volatility, because commodity prices can fluctuate in a wide range
- International markets, most notably Asia and Europe, may outperform U.S. equities this year
From time-to-time, it is important to take a broad view of the market, so we can better understand the changing conditions and dynamics. Five month ago, back in November 2014, our momentum screen showed that the top 10 Fidelity mutual funds were all equity funds representing the consumer, health care and transportation sectors of the U.S. economy (see article).
While equity funds continue to outperform bond funds, the picture is very different now. Mutual funds investing in energy and other natural resources, and international markets are the market leaders. At the same time, select U.S. sectors, such as utilities, are lagging:
Speculation about bottoming oil and commodity prices have caused an impressive rally in the natural resources sector. A great way to participate in the potentially long-term bullish trend in this sector is via the Fidelity Select Natural Resources Fund (FNARX).
The Fidelity China Region fund (FHKCX) is now the best year-to-date performer of all Fidelity mutual funds with a 20.97% gain.
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