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:

 

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:

 

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.

 

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:

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:

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:

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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Stock Market Sell-off is Caused by Rising Interest Rates; Cyclicals, Financials and Industrials Remain the Strongest Sectors; Treasury Bond Funds Underperform

In January the stock market became dangerously overbought following the tax reform rally, and as we anticipated, a sell-off occurred:

Chart 1.

The sell-off was triggered by rising interest rates, fears of rising inflation, and the potential of a more aggressive monetary policy by the Federal Reserve.

A worrisome sign for the stock market is that shorter-term interest rates are rising faster than long-term rates, which could lead to yield curve inversion, a condition where short-term rates are higher than long-term interest rates. The bottom panel of Chart 2. shows the ratio of the 10-year vs. 30-year yield indexes. The ratio line is steadily rising since last July, as denoted by the blue arrow:

Chart 2.

Rising interest rates negatively impacted funds that invest in this space:

Chart 3.

The stock market sell-off is uneven with some sectors falling faster than others. Currently, the spread of the total return between the best and the worst sectors over the last three months is 25%. Should the market continue to drop, we think that this spread will continue to widen. Conversely, if we see a relief rally by mid next week, the spread will probably become more narrow.

Chart 4.

The industry groups with the strongest relative strength vs. the S&P 500 index are the cyclicals (consumer discretionary), financials and industrials. We’d like to highlight financial services and defense stocks (part of the industrials group) as two sectors that can potentially lead the market once the market correction ends.

Chart 5.

Chart 6.

Chart 7.

We continue to like the technology sector, as well, because of its lesser dependence on changes in interest rates and because of the proliferation of disruptive technologies from robotics to intelligent software:

Chart 8.

 

View fund ratings at FidelitySectorReport.com for more information.

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Real Estate Funds at All-Time High Levels

A stealth rally is under way in real estate equity and income investments, while most of the financial media is focused on developments around oil and other natural resources.

The Fidelity Real Estate Portfolio Fund (FRESX) is now at a new all-time high level surpassing the previous high reached in January of 2015:

Our favorite investment in this space is the Fidelity Real Estate Income Fund (FRIFX) that is also at a new all-time high:

Read more about investment strategies at FidelitySignal.com.

 

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5 Top Fidelity Mutual Funds to Watch in 2015

Summary

• A technical screen of Fidelity mutual funds shows that new investment areas emerged in 2015 to lead the market
• The natural resources sector, which includes energy, has the potential to provide market-beating returns. On the other hand, investors shouldn’t expect low volatility, because commodity prices can fluctuate in a wide range
• International markets, most notably Asia and Europe, may outperform U.S. equities this year

From time-to-time, it is important to take a broad view of the market, so we can better understand the changing conditions and dynamics. Five month ago, back in November 2014, our momentum screen showed that the top 10 Fidelity mutual funds were all equity funds representing the consumer, health care and transportation sectors of the U.S. economy (see article).

While equity funds continue to outperform bond funds, the picture is very different now. Mutual funds investing in energy and other natural resources, and international markets are the market leaders. At the same time, select U.S. sectors, such as utilities, are lagging:

Speculation about bottoming oil and commodity prices have caused an impressive rally in the natural resources sector. A great way to participate in the potentially long-term bullish trend in this sector is via the Fidelity Select Natural Resources Fund (FNARX).

The Fidelity China Region fund (FHKCX) is now the best year-to-date performer of all Fidelity mutual funds with a 20.97% gain.

Visit FidelitySignal.com for additional investment strategies.

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Capital Gains Distributions for Fidelity Funds are Available

Several Fidelity funds experienced large drops of their net asset values (NAVs) on Friday. The explanation is that Friday was the ex-dividend date for many Fidelity funds. The pay date for the funds is Monday, April 13. For investors who chose to reinvest the distributions automatically, the value of their holdings will be adjusted on Monday. For investors who chose not to reinvest, their investment account will be credited by the distribution amounts.

The full list of funds receiving dividends and capital gains distributions is available here:

https://www.fidelity.com/mutual-funds/prices-documents/distributions

Here are a few examples of Fidelity funds with large capital gains distributions:

How can an Aggressive Growth Strategy Beat the Market in 2015 (continued)

Summary

• We continue to track the performance of the FidelitySignal Aggressive Growth strategy (see details in previous article) in a difficult investment environment
• Increased market volatility resulted in a sell signal for the materials sector fund, while the other components of the strategy continue to advance
• As the next earnings season approaches, the economic effect of the strengthening dollar may cause additional volatility

The FidelitySignal Aggressive Growth strategy continues to outperform the market in 2015. The current asset allocation is as follows:

Increased volatility in the materials sector resulted in a sell signal for the Fidelity Select Materials Fund (FSDPX) and the fund was removed from the portfolio:

The other portfolio components, such as the Fidelity Southeast Asia Fund (FSEAX), the Fidelity Construction and Housing Fund (FSHOX), the Fidelity Select Medical Delivery Fund (FSMEX) and the Fidelity Select Consumer Staples Fund (FSDAX) have contributed to the strong performance of the strategy in 2015:

 

 

 

Visit FidelitySignal.com for additional investment strategies.

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Sector Rotation: Technology Sector Outperforms in 2015; Avoid the Utilities and Natural Resources Sectors

Summary:

• The technology sector, led by Apple, semiconductor and large cap Internet companies, has become one of the leading equity sectors in 2015
• Rising interest rates resulted in a trend reversal for the utility sector
• The strengthening dollar and declining energy prices cause the natural resources sector to resume its decline

The Nasdaq index (where many of the market-leading technology companies are listed) closed above the historically important 5,000 level yesterday. This level has not been seen since the dot com bubble of 2000. This time around, we think that the bull market in the technology sector is sustainable and stock prices will go higher from here.

One of the best ways to participate in this trend for Fidelity mutual fund investors is by building a position in the Select Technology fund (FSPTX). The top portion of the chart below shows that the relative strength of FSPTX compared to the S&P 500 has turned positive in 2015, which is a very bullish sign:

Steadily rising long-term Treasury rates caused a sharp sell off in the interest rate sensitive utilities sector. The chart of the Fidelity Select Utilities Fund (FSUTX) shows that the sector is not participating in the stock market rally and has broken its long-term uptrend:

In a previous article we warned that it is too early to invest in the natural resources sector. In spite of the rally in January, this sector continues to be in a downtrend and we think that there are many better investment opportunities in this market.

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

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How can an Aggressive Growth Strategy Beat the Market in 2015

Summary:

• Global equity markets are “climbing a wall of worry”, in spite of uncertainty about the potential exit by Greece from the Eurozone and geopolitical events in the Ukraine, in the Middle-East and in Latin America.
• Quantitative easing by the European Central Bank and the Bank of Japan can lead to inflation of financial assets in 2015
• Low interest rates and much reduced energy costs have started to fuel a new boom in consumer spending in the U. S.
• The best growth strategy this year may be to diversify between market-leading sectors and emerging investment areas (source: FidelitySignal.com)

Broad market indexes, such as the S&P 500, the Dow Industrial Average and the Nasdaq, are making higher highs again after a treacherously volatile two-month period starting in early December. The good news is that investors have not shied away from risk-on investments, which is very bullish.

The FidelitySignal Aggressive Growth model portfolio can provide an example of how an aggressive asset allocation strategy can work in the current market environment. The asset allocation mix of the portfolio consists of five Fidelity mutual funds. The funds represent investments in both leading sectors and emerging investment areas:

The FidelitySignal Aggressive Growth model portfolio currently holds positions in market-leading sectors, such as medical delivery, construction and housing, and consumer staples:

One of the exiting new investment opportunities is materials/chemicals. This sector should continue to benefit from low oil prices and increased demand:

Southeast Asian economies with strong ties to the Euro market can be great beneficiaries of improved condition in the Euro zone:

Additional investment strategies are available at FidelitySignal.com

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Stock Market is at All Time High Again; New Investment Opportunities Emerge

The chart of the Fidelity Spartan U.S. Equity Index Fund (FUSEX) shows that U.S. equities broke out from a volatile trading range that started in early December of last year. At the same time, the yield of Treasury bonds reversed course, which caused the Spartan Long-Term Treasury Bond Fund (FLBIX) to correct:

Mutual funds investing in the leading sectors have continued to advance this year, but may be ripe for a pullback now to their respective moving averages (blue lines on the charts):

 

As the equity market has turned more bullish again, sector rotation has intensified, as well. This is good news for investors, since new investment opportunities are emerging. One example is the Fidelity Select Materials Fund (FSDPX):

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

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