Sector Rotation: Defense and Telecom Sectors Break Out to New Highs

The Fidelity Defense and Aerospace Fund (FSDAX) and the Fidelity Select Telecommunications Fund (FSTCX) broke out from their trading ranges to new highs and turned bullish from the technical point of view:

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The Stock Market is Climbing the Proverbial Wall of Worry

The S&P 500 index continues to climb in September, in spite of worries about multiple potential trade wars:

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As we highlighted in June (read article), the strong economy and increased consumer spending favor the consumer cyclical sector. That is why one of our favorite sector investments is the Fidelity Select Consumer Discretionary Fund (FSCPX):

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Why are Emerging Markets Declining?

The rapid decline of the Turkish Lira and an unstable geopolitical environment caused an exodus of investment capital from Turkey:

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The U.S. dollar continues to appreciate steeply against all major currencies, as investors are buying safe-haven investments denominated in the dollar.

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The combination of the weak dollar, a potentially broad trade war and the free fall of the Turkish market has created a bear market in emerging markets around the world:

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History tells us that bear markets do not resolve overnight. While an oversold rally is quite possible for emerging market equities, we think that select U.S. sectors offer the best risk-adjusted returns.

 

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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:

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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.

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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.

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Can Small-Caps Outperform in 2018? Top Fidelity Funds to Participate

Out of the four major U.S. indexes, the small-cap Russell 2000 is the first one to surpass the January high and reach an all-time record level:

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We view the relative outperformance of small-cap companies a positive development for the overall market. Small companies are responsible for most of the job creation in America and their strength signals a vibrant and growing economy.

Several large-cap sectors that are not impacted by the stronger dollar and by the rising interest rates are also performing well. Click here for a list of the top-rated industry groups.

Based on our technical screen, we like the Fidelity Small Cap Growth Fund (FCPGX) the most in the current market environment:

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One of our long-time favorites, the Fidelity Low Priced Stock Fund (FLPSX) is also performing well:

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Sentiment is Turning Bullish Again; Five Sectors that can Lead the Market Higher

Strong earnings and a potential breakthrough in the negotiations with North Korea made investors feel more cheerful and caused a broad rally in the stock market.

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Equity markets around the globe rallied in recent days, but the U.S. market continues to be the leader.

Rising tensions in the Middle-East and the strengthening dollar resulted in the energy and natural resources sectors becoming the strongest performers in the last three months (see article):

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Large-cap real estate stocks also rallied, as we highlighted earlier (see more):

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We also like the bullish trends in technology, medical devices, and financials sectors:

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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.

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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.

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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.

 

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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.

 

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