Market Rotation: Top 3 Sector Funds for Risk Averse Investors

Summary:

  • A technical screen of all Fidelity sectors mutual funds shows that only three sector funds were able to make new highs after the late July selloff, while consistently outperforming the S&P 500 index throughout 2019
  • In our view, these sector funds can continue to outperform in the last three months of 2019, while offering lower investment risks than other sectors
  • The full sector screen is available at FidelitySectorReport.com

 

The S&P 500 index was not able to reach a new record high in September after the late July selloff:

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To identify the best investment opportunities in the current market environment, we performed a momentum screen of all Fidelity select sector funds using the three-month total return. The screen showed that the Construction & Housing (FSHOX), the Wireless (FWRLX) and the Telecom and Utilities (FIUIX) funds are the leading investments right now:

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We found that these sector funds were able to break out to new highs and continue to advance in spite of the recent stock market volatility and fluctuations in interest rates. We think that this trend is due to the continued flow of money into these sectors by risk-averse institutional investors, and will likely continue into early 2020.

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Cyclical growth sectors can produce attractive returns when the market sentiment turns bullish. In our view, the Fidelity Select Computers (FDCPX) fund stands out in this category by being able to make a new record high after the July selloff:

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Global Equity Markets Rally in Volatile Trading; Emerging Markets Outperform U.S. Indexes

U.S. stock market indexes rallied in January after a steep sell-off in late December:

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Figure 1. The S&P 500 index partially recovered in January from the steep sell-off that started in October of 2018.

The major drivers for the weakness in equity markets, such as rising interest rates and a trade dispute between the U.S. and China, are still unresolved. Therefore, we think that volatility is likely to continue in Q1 2019.

In our view, the best investment opportunities right now are in emerging markets:

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Figure 2. The chart of the Fidelity Emerging Markets Fund (FEMKX) shows a bullish “double bottom” price pattern.

We especially like the Southeast Asia region based on relative performance:

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Figure 3. The Fidelity Southeast Asia Fund (FSEAX) shows improving relative performance, as measured by the ratio of FSEAX and the S&P 500 Index (bottom panel).

 

View fund rankings at FidelitySectorReport.com for more information.

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The Stock Market Reacts Negatively as Fed Raises Interest Rates; Oversold Sectors are Ready for a Bounce

The broadly followed S&P 500 index continued its slide and it is now below the February low:

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The Fed’s comments in combination with rising fears of a global economic slowdown negatively impacted the credit markets, as well. The chart shows that the ratio of the 5-year and 2-year U.S. Treasury notes is below 1 now. This condition is referred to as inversion of the yield curve, which may signal that the risk of a recession is higher than previously thought:

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Almost all sectors show a negative performance for the last three months:

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Gold miners and utilities are holding up the best:

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We think that highly oversold sectors, such as banking and energy services, are ready for a bear market rally:

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View fund rankings at FidelitySectorReport.com for more information.

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Will the Stock Market Crash? Natural Resources, Industrials, and International Markets are Already in Bear Market Territory

The S&P 500 index broke below its trading range Friday, which is the latest sign of the deterioration of the U.S. stock market:

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Investor pessimism is driven by the slowing growth of the global economy, rising interest rates, trade wars, the Brexit negotiations, and several other geopolitical factors. We think that we are at an inflection point and crash-like conditions can develop quickly.

A worrisome sign for us is the lack of sector leadership. Gold is the only sector that shows a positive return for the last three months:

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While the Fidelity Select Gold Fund (FSAGX) has outperformed recently, the chart does not show a bullish price pattern yet. FSAGX will have to break above the long-term trendline to start a new bullish trend:

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On the other hand, the chart patterns of the weakest U.S. sectors, such as energy and industrials, are very negative:

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In a previous article, we described the turmoil in global markets. European and Emerging Markets continued to deteriorate since then and do not offer investment opportunities at this point in our view:

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View fund rankings at FidelitySectorReport.com for more information.

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Large Price Drops of Multiple Fidelity Funds are Caused by Capital Gains Distribution

The large price drops of several Fidelity funds at the end of the Friday trading session were due to the distribution of capital gains, which happens periodically. The details are provided by Fidelity at https://www.fidelity.com/mutual-funds/information/year-end.

Here are a few examples:

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View fund rankings at FidelitySectorReport.com for more information.

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Equities React Positively to the Outcome of the Mid-term Elections; Real-estate, Telecom, Utilities, and Healthcare Providers Funds Advance

Both the U.S. and the international markets reacted positively to the outcome of the mid-term elections with all major sectors rallying today. International markets rallied strongly, as well. Investor sentiment turned positive too, while consumer spending remains high. As we wrote previously, we’d like to see a strong December rally that can continue into the first quarter of 2019.

We’d like to highlight the Fidelity Real Estate (FRESX) and the Fidelity Telecom (FSTCX) funds today:

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We continue to like the Fidelity Utilities (FSUTX) and the Fidelity Healthcare Providers (FSHCX) funds:

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View fund rankings at FidelitySectorReport.com for more information.

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Global Stock Markets in Turmoil; Crash-like Conditions can Develop Unless We Get a Bounce Soon

The VIX volatility index (often called the fear indicator) spiked in the last few days, reflecting a deteriorating investor sentiment:

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Global markets started out on a good note in the morning, but reversed by the afternoon. One of the few bullish international markets, the Brazilian stock market, broke out of the trading range in the morning due to the election win of an anti-establishment presidential candidate. Unfortunately, the gains turned negative by mid-day and closed below the close of the previous day on high volume. This price pattern is called the bearish outside reversal, not a good sign for Latin American markets.

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Argentina and Mexico, the other two large Latin American markets are already in bear market territory:

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European markets are also declining steeply. Interestingly, following Angela Merkel’s statement about not seeking re-election as her party’s leader resulted in a small rally in German equities. In spite of that, the stock market of the strongest economy in Europe is clearly in a negative trend:

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Another disappointment was the performance of the technology-heavy Nasdaq index. The chart of the Nasdaq 100 tracking ETF (QQQ) shows the same bearish outside reversal pattern:

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The large-cap S&P 500 index is also deteriorating and seems to be heading to the February low:

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Looking at the relative performance of sectors, the results are unusually negative with only a handful of sectors producing small positive returns over the last three month period:

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Perhaps the only sector that is in a reasonable uptrend is utilities, which in our interpretation shows a very defensive investor sentiment:

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In our survey, the semiconductors sub-sector is the weakest, and we think that it still has room to fall:

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On the other hand, materials, another lagging sector, is highly oversold based on the RSI indicator and could be ready for a short covering rally:

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View fund rankings at FidelitySectorReport.com for more information.

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