Geopolitical Risks May Cause Flight to Safe Haven Investments

Increased tensions on the Korean peninsula and in Syria can adversely impact the already weakening stock market really.

In our view, an early warning sign is the sudden outperformance of safe haven investments, such as Treasury bonds and gold.

The chart below shows that the Spartan Long-Term Bond Fund (FLBIX) started moving higher already by breaking out from a six-month trading range:

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The Fidelity Select Gold Fund (FSAGX) was the best-performing Fidelity fund today with a 2.63% gain, and may be on the verge of breaking the long-term downtrend line:

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Global Equity Markets in Turmoil Due to Fears About Rising U.S. Interest Rates; Best and Worst Investments in a Highly Volatile Market

Long-term U.S. Treasury yields have been rising in the last four weeks, as traders anticipate the Fed to raise rates possibly as early as June. In addition, the dollar has continued to make impressive gains against all major currencies, as quantitative easing in Europe and Japan is under way.

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The potential for rising interest rates in the U.S. and the steep rise of the dollar has led to a sell off of equities, bonds and commodities around the globe.

The S&P 500 index has retreated from its recent high and now in negative territory for the year. In spite of rising volatility, the chart of the benchmark Fidelity Spartan U.S. Equity Index Fund (FUSEX) shows that the long-term trend for U.S. equities is still bullish:

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Another important development is that commodities and oil continue to deflate, reversing the short-lived rally in January:

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In light of the rising dollar, the bear market in commodities and weak economic conditions in international markets, it is not surprising to see the Fidelity Select Energy Services Fund (FSESX), the Fidelity Select Gold Fund (FSAGX) and the Fidelity Latin America Fund (FLATX) amongst the weakest performers year-to-date:

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The few sweet spots in the current market are sectors that are not sensitive to interest rates and rely on innovation to create growth. Perhaps the most notable is the health care sector, including biotechnology stocks:

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The dynamic interplay of equities, bonds, currencies and commodities is shifting market conditions again. We continue to favor a conservative, risk averse investment approach in 2015.

Read more about investment strategies at FidelitySignal.com

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Is it Time for the Contrarian Bet?

Summary

  • The direction of the financial markets have not really changed that much since late last year, but volatility for U.S. equities is much higher
  • In our view, the risk/reward ratio of taking contrarian investment bets is not favorable right now, but that can change rapidly in the near future
  • A select few sectors are still in a bullish uptrend
  • This is a very dangerous market where increasing the cash allocation seems to be the prudent choice. Sudden and violent moves can happen rapidly in the currency, commodity, equity and bond markets.

Often, the weakest investments from last year can turn out to be the best performers in the next. Since international markets and sectors related to natural resources have fallen tremendously in 2014, it is tempting to take contrarian bets right now and hope to be able to buy close to the bottom. However, whether we like or not, timing can be critical and jumping into a declining investment can have a devastating effect on an otherwise well-balanced portfolio.

When volatility is increasing, it is always useful to take a longer-term view of the direction of the key asset classes. As we can see from the two-year charts below, long-term Treasury bonds are still declining, the dollar is still advancing against a basket of major currencies, and commodities, such as crude oil, are still falling.

Perhaps the most striking feature of these charts is the steepness of the curves. While it is tempting to believe that the direction of the trends is about to reverse in a big way, the reversals have not happened yet, and we simply cannot know if the next rally/sell off will be temporary, or, if it will mark a turn of the long-term trend.

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While the long-term trends for the other three asset classes have not changed yet, U.S. equities have started experiencing increased volatility since November 2014, and now are locked in a trading range. The long-term trend is still up, but the U.S. stock market is on the cusp of rolling over.

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Is it time to buy beaten down stock sectors, such as commodities or gold, or jump into Latin American equities? We think that the risks are too high right now, but would not be surprised to see these investments outperforming the market at one point in the future.

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The Wall Street adage says that there is always a bull market somewhere.  The charts below show a sampling of Fidelity income and equity funds that have done exceptionally well in the recent period, and may continue to outperform:

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Read more about investment strategies at FidelitySignal.com

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Long-Term Bullish Trend is Intact for U.S. Equities, in spite of Increased Volatility; Gold Forms a Bullish Double-Bottom Chart Pattern; It is Still Early to Invest in the Energy Sector or in International Equities;

It is always good to take a look at long-term trends when short-term volatility increases, in order to have a better sense of the market direction. While the widely anticipated stock market correction remains a possibility, in our view, the long-term bullish trend for U.S. equities is still intact.

The chart shows that the multi-year uptrend for the benchmark Fidelity Spartan U.S. Equity Index Fund (FUSEX) has not yet been interrupted by the recent market volatility:

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In a recent article (see Best Fidelity Mutual Funds for 2015) we highlighted the most attractive investments for 2015. The selected mutual funds have continued to perform well in the last few weeks of trading. Especially, conservative sectors, such as real estate, utilities, medical equipment and consumer staples have outperformed the S&P 500 index:

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Perhaps, the most interesting new development in 2015 is the renewed interest in buying gold mining stocks. The chart of the Fidelity Select Gold Fund (FSAGX) below shows a short-term bullish double bottom pattern and increased buying activity during the first two weeks of the New Year. However, gold has a long way to go before it can establish a long-term uptrend.

While gold is traditionally viewed as an inflation hedge, in the current deflationary environment precious metals are looked at as an alternate asset class that can potentially serve as a volatility hedge. We’d like to caution investors, that while gold can provide returns that have low correlation with equities, this sector is highly speculative and is more appropriate for the purposes of short-term trading than long-term investing.

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As noted in earlier articles, we believe that it is still too early to diversify into the weakest sectors, such as natural resources (in particular energy), and into underperforming international markets.

The blue lines on the charts of the Fidelity Select Energy Fund (FSENX) and the Fidelity Latin America Fund (FLATX) indicate that the bearish downtrends that are still in place:

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Read more about investment strategies involving these funds at FidelitySignal.com

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The Best Fidelity Mutual Funds for 2015

Summary:

  • Economic conditions continue to favor real estate investments
  • Municipal income and mortgage securities can provide an alternate source of income for bond investors
  • Style rotation: value investing is likely to outperform growth stocks in 2015, just as small caps have the potential to outperform large caps
  • Gold has not yet emerged as a good choice for diversification
  • It is too early to invest in the energy sector or in international equities

The slowly improving U.S. economy and low interest rates have created a favorable environment for real estate investments. The Select Construction and Housing Fund (FSHOX) and the Real Estate Income Fund (FRIFX) are two excellent Fidelity funds, which allow investors to participate in this trend. The blue arrow in the top panel of the chart below shows that FSHOX has a positive relative strength compared to the S&P 500 index, because FSHOX has outperformed the S&P 500 index since August of 2014. Similarly, FRIFX has outperformed the benchmark Fidelity Spartan U.S. Bond Index Fund (FBIDX).

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As the U.S. economy continues to improve, the Fed may start to increase interest rates in late 2015 or early 2016. In a rising interest rate environment bond investors may find it increasingly difficult to identify income funds that do not decline in value. As an example, the Fidelity High Income Fund (SPHIX) has already started to decline:

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Two income funds that can outperform in 2015 are the Fidelity Spartan Municipal Income Fund (FHIGX) and the Fidelity Mortgage Securities Fund (FMSFX). The current yield of FHIGX is 3.54%, while FMSFX yields 2.49%.

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Style rotation refers to the periodic over and under performance of different investment styles, such as growth vs. value, or large cap vs. small cap. For most of 2014 growth has outperformed value investing, and large caps have outperformed small caps. In 2015, we think that these relative trends can easily reverse. Two Fidelity funds, which can help investors to participate, are the Fidelity Value Fund (FDVLX) and the Fidelity Low-Priced Stock Fund (FLPSX):

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Investing in gold mining stocks can provide an attractive opportunity for portfolio diversification. Of course, the best time to invest in the gold mining sector is when it is not declining. Unfortunately, that is not the case right now. However, should this trend reverse, the Fidelity Select Gold Fund (FSAGX) is an excellent mutual fund for investing in this sector.

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The history of the stock market shows that the weakest investments in one year can often become the best performing investments a year or two later. However, looking at natural resources and international stocks, the two weakest investments areas in 2014, we think that they likely to continue to decline in early 2015, therefore it is too early to accumulate an investment position.

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Read more about investment strategies involving these funds at FidelitySignal.com

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Stock Market Correction: Own the Best Fidelity Funds to Avoid Volatility

Stock market volatility continued today, with the S&P 500 index and all other major U.S. equity indexes either approaching correction territory or already in it. The increase of the volume during the sell-off is disconcerting and may indicate deleveraging by large hedge funds and institutional investors.

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As the equity market correction has been unfolding, in previous articles I have highlighted the “falling knives”, the investment areas that prudent investors should avoid. The two weakest investment areas continue to be Euro stocks and energy/natural resources sectors.

Relentless selling has caused tremendous drops already. Consequently, I would not be surprised to see a violent relief rally taking place in these highly oversold markets in the near future.

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While equity markets experience their first serious disruption since the panic of the August 2011 credit-rating downgrade of the U.S. debt, it is worth taking a look at other financial markets, as well.

Most notably, and unexpectedly, interest rates of the long-term Treasury bonds continue to decline rapidly. Paradoxically, as the Federal Reserve has tapered off its bond-buying program, demand has increased for U.S. Treasury bonds, pushing the yield lower. However, this effect is exacerbated by increased reserve requirements for banks and, more recently, the “flight to quality” due to the equity market correction.

Nonetheless, since financial markets often forecast economic conditions 12 to 18 months into the future, the rapidly declining interest rate of long-term Treasuries is probably not a good sign and may signal that the bond market is anticipating economic contraction in 2015 and beyond.

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One of the confounding factors of market action has been the rapid rise of the dollar against all major currencies from August through October. Many commentators have attributed changes in the market to the strengthening of the dollar, however, since the beginning October, the dollar has pulled back and no longer appears to play a key role in determining stock market dynamics. A further weakening of the dollar from these levels could potentially help U.S. multinational companies to report improved earnings in early 2015.

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Commodities, as a group, have experienced a huge deflation since July. Energy and metals are the weakest, while some agricultural commodities are showing signs of bottoming out.

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Perhaps the only silver lining in the commodities space right now is silver, and of course gold, as these two metals are highly correlated. After a devastating decline staring in September 2011, gold bullion bottomed out in July 2013 and has been in a wide trading range ever since.

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I’d like to highlight here two conservative investments, which have worked well throughout 2014, regardless of market volatility. The first one is the Fidelity U.S. Bond Portfolio (FBIDX). FBIDX is a highly diversified bond fund that is appropriate for conservative investors.

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My top pick for the current market environment is the Fidelity Spartan Municipal Income Fund (FHIGX). Its low volatility and a tax-equivalent 3.55% yield continues to make FHIGX a very attractive investment choice.

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A word of caution for bond investors: unfortunately, not all bond funds have done well since the market correction started. High-yielding corporate bonds tend to track the stock market trends more closely than the interest rate trends, and are in a decline now.

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View investment strategies at FidelitySignal.com

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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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See more portfolio strategies at FidelitySignal.com

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