European Markets in Downtrend

Both weakening economic conditions outside of the U.S. and geopolitical risks have caused the dollar to strengthen against all major currencies since May, including the Euro:

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The weak Euro coupled with renewed fears about recession in the Eurozone have negatively impacted European equities. Prudent investors may want to avoid investing in European equity markets until the downtrend reverses.

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The Fidelity China Region Fund and the Spartan Long Term Treasury Bond Fund Show the Best Relative Strength in the Aftermath of the Market Sell Off

Yesterday, the sharp stock market sell off spooked many investors. Several equity sectors were down more than 2% and the selling was broad-based. The cause of the sell off was a combination of mixed signals about the U.S. economy and the increase of geopolitical risks in Argentina, the Ukraine and the Middle East.

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While equities closed lower again today, the late afternoon rally increased the likelihood of the return of a more stable market next week. The Fidelity China Region Fund (FHKCX) held up the best during the sell off and may continue to do so should the equity sell of resume in September. The FHKCX chart shows that the strong bullish trend is still intact and the relative strength vs. the S&P 500 continued to increase during the sell off.

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Treasury bonds often serve as safe haven in volatile markets. It is widely expected that interest rates will rise in the near future, which should cause the price of long-term Treasury bonds to fall, not to rise. Consequently, a continued bull market for Treasuries may serve as a cautionary signal for equity investors (see Spartan Long Term Treasury Bond Fund chart below). Also, we are approaching the seasonally weak September-November period when most of the market crashes occurred. Taken together, the market action should caution investors to steer away from high risk investments until conditions stabilize.

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Buy and sell signals for Fidelity funds are available at FidelitySignal.com

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Select Materials Fund Shows Negative Relative Strength

The stock market sell off yesterday caused all Fidelity select sector funds to decline. As we approach the often volatile fall season we are not surprised to see investors reducing “risk on” investments. To identify the weakest sectors we use relative strength that measures the performance of a given investment compared to the S&P 500 index.

One of the weakest Fidelity funds based on this measure is the Select Materials Portfolio (FSDPX). The top panel of the FSDPX chart below shows that the relative strength is declining at an accelerated pace (see blue line). This suggests that the net asset value of FSDPX can decline more rapidly than the equity market in case of a continued sell off.

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Buy and sell signals for Fidelity funds are available at FidelitySignal.com

 

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The Defense Sector Lags the Market

The earnings season often brings volatility for equities, but this summer the bullish trend stayed uninterrupted for the S&P 500 index. The benchmark Fidelity Spartan U.S. Equity Index Fund (FUSEX) has gained an impressive 5.85% return in the last three months:

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The Fidelity Select Defense/Aerospace Fund (FSDAX) is the weakest performing Fidelity fund with a -2.63% year-to-date return. The chart below shows that the relative strength of this sector has been declining since the January correction. The chart pattern is negative, as well. We would avoid investing in this sector until FSDAX regains its momentum and moves above the 100-day moving average line.

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Gold Stocks Enter a New Bull Market

After reaching a multi-year low a year ago, the Fidelity Select Gold Fund (FSAGX) has now decisively advanced past a treacherous up and down trading range and started the initial stage of a potentially long-term new bull market.

The first rally came in August 2013, which signaled the end of the bear market for the gold sector. However, prices unexpectedly reversed the bullish trend in September following the highly publicized selling of gold assets by hedge funds, which also coincided with low inflation expectations.

In December, gold stocks revisited the June lows, but were able to hold this level creating a chart pattern that is known as the double bottom. From the December low the sector rallied strongly and has been making higher highs and higher lows, which is one of the hallmarks of a bullish trend. As the result, the Fidelity Select Gold Fund (FSAGX) is the best performing Fidelity mutual fund so far in 2014 with an outstanding 35.11% return.

We must caution investors that the gold sector can be highly volatile and investing in gold stocks is often regarded as highly speculative. Investing in the broader natural resources sector provides more diversification and may be more appropriate for a conservative portfolio (read more on the Fidelity Natural Resources Fund).

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The Dow Jones Industrial Average Index cannot Hold the 17,000 Level; Biotech Sector Shows Signs of a Possible Correction; Real Estate Stocks may be Ready for a New Rally

Ahead of the July 4th holiday, the Dow Jones Industrial Average briefly reached the all-time high 17,000 level, but was not able to hold it this week. The chart below shows that the Dow is still in a bullish uptrend, but what makes us concerned is the more severe sell-off in market leading sectors, such as biotechnology.

We are also approaching the seasonally weak fall period. Since many of the infamous stock market crashes occurred between September and November, we caution our readers to be increasingly careful with committing new funds to “risk on” investments.

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The biotech sector has been one of the market leaders in the last 18 months. The chart shows that the sector corrected hard from the March highs in April and May, but was able to rally back in June. The large 3.14% drop of the Fidelity Biotechnology Fund (FBIOX), which is the largest biotechnology fund available to investors, is concerning, because it may signal the start of a market correction.

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While aggressive equity sectors got hit hard today, long-term Treasury bond rates trended lower, which helped interest rate sensitive investments to go higher. One of our current favorites in this space is the Fidelity Real Estate Portfolio Fund (FRESX). FRESX was one of the few Fidelity funds that posted a gain today and we would not be surprised to see FRESX to hold its current bullish trend even if stock market conditions weaken.

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Buy and sell signals for Fidelity funds are available at FidelitySignal.com

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Two Investment Strategies that can Help you to Take Advantage of Declining Interest Rates

Already low interest rates have prompted many market observers to call for the decline of interest rate sensitive investments when the New Year started in January, but the opposite happened. Long-term treasury yields dropped and continue to decline:

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As Treasury bond yields declined and the economy showed signs of improvement, investors have started to seek out high-yielding corporate bonds. The Fidelity Capital and Income Fund (FAGIX) is an excellent way to participate in this trend:

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Emerging market economies are known to experience cycles of boom and bust. The boom periods can be highly rewarding for investors by producing double or sometimes even triple digit gains, while the bust periods tend to make risk averse investors exit these markets and seek out low-risk investments.

Declining interest rates, market friendly Fed policies, slow and steady economic growth, increased risk tolerance by investors and renewed appetite for investments with outsized returns have created a new bull market in emerging market equities in late spring. Our favorite fund in this space is the Fidelity Emerging Markets Fund (FEMKX), which have produced stellar returns since its inception in 1990.

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Buy and sell signals for Fidelity funds are available at FidelitySignal.com

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Top 10 Fidelity Mutual Funds

The salient feature of the bullish uptrend of the U.S. equity market this summer is low volatility. Most sectors are up since the last correction in February. The benchmark Fidelity Spartan 500 Index Fund (FUSEX) has returned 6.56% in the last three months.

As energy prices have slowly increased since January, it is not surprising to see Fidelity funds investing in the natural resources sector dominating the list of the top 10 Fidelity funds (ranking is provided by FidelitySignal):

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One of our favorite investments in this sector is the Fidelity Natural Resources Fund (FNARX). FNARX has provided an excellent 35.48% gain since the buy signal was issued on April 22, 2013. The top panel of the chart below shows that the relative strength of FNARX compared to the S&P 500 index has been increasing, which continues to make this mutual fund an attractive investment:

 

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Buy and sell signals for Fidelity funds are available at FidelitySignal.com

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New Investment Trends: Latin American Equities can Turn Hot Again; Municipal Bonds are Shining in 2014

Long time observers of the financial markets know that the top investment areas from last year are often become laggards the next year, and vice versa. This year is no exception. Last year’s market leaders, which include social media, biotechnology and solar energy stocks are struggling to gain momentum, while new investment opportunities are emerging in unexpected ways.

One of our favorites is the newly emerging bullish trend in Latin American equity markets. Economic and social challenges are highly publicized for countries in the region. However, the chart pattern for the Fidelity Latin America Fund (FLATX) is turning bullish. Markets can anticipate changes in underlying economic conditions 6 to 12 months into the future. If this is the case for Latin American stock markets, then this may be a perfect time to take initial positions.

The top panel of the chart below plots the ratio of FLATX and the S&P 500 and we can see the reversal of last year’s underperformance by FLATX. The bottom panel shows the bullish chart pattern of FLATX breaking a long-term downtrend, and after a few weeks of consolidation, beginning to move higher:

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The second emerging trend is in municipal bonds. Investors got weary of the news last year both about the bankruptcy of the city of Detroit and the potential default of the government debt of Puerto Rico, which brought the municipal bond market down. But this year is different. The Fidelity Spartan Municipal Income Fund (FHIGX) shows a bullish breakout by making a new high above the resistance level:

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The long-term chart of FHIGX shows that this emerging new trend in the municipal bond market can become a great way for investors to diversify:

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Buy and sell signals for Fidelity funds are available at FidelitySignal.com

 

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Sector Rotation: Gold and Utilities Stocks are Poised to Advance; Avoid the Telecommunications Sector

Equity markets  sold off this week due to worries about the escalation of the Ukraine situation and the fears about the potential weakening of the Chinese economy.

Few sector funds are making higher highs in this negative market environment of the last few days. We highlight here Fidelity funds corresponding two sectors, gold and utilities, which show the strongest relative strength compared to our benchmark Fidelity Spartan U.S. Equity Index Fund (FUSEX).

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Both the price action and the declining relative strength line (the ratio of the investment versus the S&P500 index) shows that the telecommunications sector is one of the weakest equity sectors right now. We would avoid investing in this sector based on current conditions.

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Buy and sell signals are available at FidelitySignal.com

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