A sharp sell-off in the Brazilian stock market spooked investors two days ago. The sell-off came after bribery allegations surfaced against the president of Brazil:
The plunge in Brazilian shares did not spread to international markets in Europe and Asia, which highlights the importance of diversification.
The chart of the Fidelity Diversified International Fund (FDIVX) shows that international markets are outperforming the S&P 500 index since March, as shown by the FDIVX:$SPX ratio line pointing up (see blue arrow in the bottom panel):
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.
Weak earnings, fierce competition, and confusion about the value of new product offerings have contributed to the under-performance of the telecom sector in 2017.
Chart 1. shows that the price pattern of the Fidelity Select Telecommunications Fund (FSTCX) turned negative earlier this week. We think that investors may be best served by avoiding this sector until the current consolidation phase completes.
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According to economic cycle theory, the economy follows a regular cycle moving from recession to recovery, and back into recession over a period of several years. Historic studies have shown that when the economy starts to recover from a recession, the consumer discretionary sector (cyclicals) is often the first to make gains closely followed by technology and industrials.
While we have not had a recession since the stock market low in 2009, the strong performance of the technology, consumer cyclicals (see Chart 1.) and industrials sectors in the last six months have raised the possibility of starting a new market cycle without a serious correction.
Starting a new market cycle without even a relatively small correction is a possibility, but would be very unusual. That is why we are on the lookout for early signs of a market pullback.
One of the cautionary signs is that media stocks, an important sub-sector of the consumer discretionary sector, reversed their uptrend today (see downgrade by FidelitySectorReport.com) due to multiple companies reporting a significant fall in advertising revenues:
The strongest sub-sector in the consumer discretionary space now is the leisure sub-sector (see Chart 3.) with names like Starbucks, Las Vegas Sands, and Marriott. We think that leisure stocks are long-term bullish, but short-term overbought, ready for a pullback:
- 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:
The S&P 500 index closed lower again today, but in our view, we are experiencing only a small correction so far:
The most important new development is the directional change of the long-term Treasury bonds yield index:
Lower interest rates and the flight to safe investments due to geopolitical risks are two factors that contribute to utilities outperforming most sectors:
Consumer staples, another defensive sector, is also making higher highs and higher lows:
The weakest sectors that investors should consider avoiding in the current market environment are energy, transportation and financials, especially banking: