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:

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

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

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

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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:

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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):

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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):

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Read more about investment strategies involving these funds 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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New Investment Opportunity in High-Yield Corporate Bonds?

Corporate bonds have experienced a volatile period since August of 2014, but the renewed demand for income producing investments and the strengthening of the U.S. economy makes high yield corporate bonds attractive again.

The Fidelity Capital and Income Fund (FAGIX) provides a great way to play this new trend. FAGIX, in spite of its name, is a high yield bond fund. The fund managers use a rigorous fundamental analysis to select investments. The chart shows that FAGIX broke out from a consolidation period, which lasted for six months. In our view, the 4.18% dividend, the potential for capital appreciation and the five star rating by Morningstar makes FAGIX an appealing investment choice.

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Read more about investment strategies involving the FAGIX fund at FidelitySignal.com

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Large Price Drop of Multiple Fidelity Funds is due to Capital Gains Distribution

The Fidelity Magellan Fund (FMAGX) and several other Fidelity sector and international funds experienced large percentage drops of their Net Asset Value (NAV) at the end of the Friday trading session due to the distribution of capital gains. Investors will receive the distributions on the “pay date”, which is Monday, December 8. For more details click here.

Here are a few examples of Fidelity funds with large price drops:

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Top 10 Fidelity Mutual Funds

The broad-based rally for U.S. stocks continues, as we approach the seasonally bullish year-end period. The list of the top 10 Fidelity funds (see more at FidelitySignal) is dominated by sector funds representing a diverse set of industries, such as retailing, consumer finance, IT services, health care and transportation:

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The top year-to-date performer is the Fidelity Select Transportation Fund (FSRFX) with 29.01% gain so far in 2014. The holdings of the fund include airline, shipping and railroad companies, which all benefit from declining energy prices.

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Equity Rally Accelerates; New Buying Opportunities

Both the Dow Jones Industrial Average and the S&P 500 indexes closed at record high levels on Friday. The catalyst was the announcement by the Bank of Japan to substantially increase its Quantitative Easing program, which was expanded to include the purchase of equity and real estate investment trust assets.

As markets now show signs of stabilization, in my view, two Fidelity mutual funds stand out as new investment opportunities: the Select Wireless Communications Fund (FWRLX) and the Low Priced Stock Fund (FLPSX). Both funds pulled back during the market correction, but have moved back above their respective moving averages and their charts show a bullish price pattern.

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Read about investment strategies involving these funds at FidelitySignal.com

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