Market Correction: Investing in the Best-Performing Sectors can Help Minimize Losses

Summary

• 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).

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.

Chart 2.

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).

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).

Chart 4.

Click here to view the rankings of all Fidelity sector funds. The performance comparisons are updated daily utilizing the momentum screen at FidelitySectorReport.com.

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The Natural Resources Boom of 2021: The Best-Performing Fidelity Funds

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.

Chart 1.

Out of the 40 Fidelity Select sector funds, Energy Services (FSESX) is the best performer (Chart 2).

Chart 2.

Large integrated oil companies are also benefiting from higher oil prices and renewed interest from investors (Chart 3).

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.

Chart 4.

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).

Chart 5.

Click here to view the rankings of all Fidelity sector funds. The performance comparisons are updated daily utilizing the momentum screen at FidelitySectorReport.com.

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Market Review

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.

Chart 1.

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).

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.

Chart 3.

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.

Chart 4.

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.

Chart 6.

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.

Chart 5.

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.

Chart 7.

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.

Chart 8.

Click here to view the rankings of all Fidelity sector funds. The performance comparisons are updated daily utilizing the momentum screen at FidelitySectorReport.com.

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The Financial Sector is Outperforming the Market and is Poised to Reach a New High

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.

View fund rankings at FidelitySectorReport.com

 

 

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Can Energy and Defense Stocks Rally Following the Allied Airstrike in Syria?

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.

 

View fund rankings at FidelitySectorReport.com

 

 

 

 

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Stock Market Correction Continues with a New Wave of Selling

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.

 

View fund rankings at FidelitySectorReport.com

 

 

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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.

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:

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:

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.

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.

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:

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:

 

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:

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:

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:

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.

 

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