Global Stock Markets in Turmoil; Crash-like Conditions can Develop Unless We Get a Bounce Soon

The VIX volatility index (often called the fear indicator) spiked in the last few days, reflecting a deteriorating investor sentiment:

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Global markets started out on a good note in the morning, but reversed by the afternoon. One of the few bullish international markets, the Brazilian stock market, broke out of the trading range in the morning due to the election win of an anti-establishment presidential candidate. Unfortunately, the gains turned negative by mid-day and closed below the close of the previous day on high volume. This price pattern is called the bearish outside reversal, not a good sign for Latin American markets.

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Argentina and Mexico, the other two large Latin American markets are already in bear market territory:

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European markets are also declining steeply. Interestingly, following Angela Merkel’s statement about not seeking re-election as her party’s leader resulted in a small rally in German equities. In spite of that, the stock market of the strongest economy in Europe is clearly in a negative trend:

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Another disappointment was the performance of the technology-heavy Nasdaq index. The chart of the Nasdaq 100 tracking ETF (QQQ) shows the same bearish outside reversal pattern:

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The large-cap S&P 500 index is also deteriorating and seems to be heading to the February low:

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Looking at the relative performance of sectors, the results are unusually negative with only a handful of sectors producing small positive returns over the last three month period:

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Perhaps the only sector that is in a reasonable uptrend is utilities, which in our interpretation shows a very defensive investor sentiment:

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In our survey, the semiconductors sub-sector is the weakest, and we think that it still has room to fall:

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On the other hand, materials, another lagging sector, is highly oversold based on the RSI indicator and could be ready for a short covering rally:

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Aftermath of the Stock Market Correction: Defensive Sectors Lead the U.S. Market; Bear Market Worsens for International Equities

Rising interest rates and hawkish comments by the Fed caused a wave of deleveraging on a global scale. Investors pulled out rapidly from equities to reduce exposure, which caused the benchmark S&P 500 index to drop below its 100-day moving average:

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The bear market in international equities, both Europe and emerging markets, accelerated to the downside:

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Clearly, smart money is rotating into defensive sectors, while technology, cyclicals, and materials continue to underperform.

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From the technical perspective, utilities look the best. The Fidelity Select Utilities Fund (FSUTX) made a new high yesterday, and we would not be surprised to see more investment money flowing into this defensive sector:

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The relative strength for the telecom and the healthcare sectors is also positive:

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The materials and the semiconductor sectors stand out as the weakest performers in 2018:

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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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Sector Rotation: Conservative Sectors are the New Market Leaders

In the last few years, the technology sector was the go-to investment for growth-oriented investors. We just had to buy the dips after sell-offs, and tech stocks would eventually rally again to make new record highs.

The example of Facebook (FB) illustrates why this may be changing as we are heading into the fall season. FB dropped 20% in 15 minutes after the disappointing earnings call in late July. The chart shows that the stock was not able to recover, as investors are shifting towards more conservative and stable investments:
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The new market-leading sectors are health care, real estate, utilities and consumer staples:

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Changing consumer habits and cord cutting put pressure on earnings for telecommunications companies in the last two years, which resulted in the sector underperforming the market. We think that this may be changing, as telecom companies re-invent their product offerings and investors renew their interest in stable large-cap investments.

We think that the Fidelity Select Telecommunications Fund (FSTCX) is an excellent way to play this emerging trend:

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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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Sector Rotation: Big Merger in the Media Sector is Good News for Investors

A federal judge approved AT&T’s purchase of Time Warner today, which can lead to more consolidation in the industry. We think that this could be a catalyst for this dynamic an innovative sector to catch up with the rest of the market.

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The Fidelity Select Multimedia Fund (FBMPX) has lagged most other sector funds in 2018, but we think that it can reverse the downtrend, as investors anticipate more mergers to come in the near future.

 

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Sector Rotation: Cyclicals are Outperforming Again; Top 3 Consumer Discretionary Funds

Low unemployment and a strong economy are boosting consumer confidence. Not surprising that the market anticipates that consumers will be spending even more on discretionary items, such as entertainment, travel and online shopping.

In our view, the best investment funds to play this trend will continue to be the ones that already perform well. We utilized the sector screen (provided by FidelitySectorReport.com) to identify the best candidates.

Top 3 Fidelity consumer discretionary funds:

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The Fidelity Select Consumer Discretionary Fund (FSCPX) provides a diversified investment in the broad sector. We like FSCPX at this point because it is outperforming the S&P 500 index again and the chart also shows a positive technical setup.

 

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The retailing sub-sector is the strongest within the cyclicals sector. The Fidelity Select Retailing Fund (FSRPX) is already at an all-time record level, but we think that it can go higher. Top holdings of FSRPX include leading companies, such as Amazon, Home Depot, Booking, and Netflix.

 

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In our view, a newly emerging investment opportunity is the Fidelity Select Automotive Fund (FSAVX). After five months of consolidation, we think that the technical picture is improving and FSAVX can catch up to the other sub-sectors in the cyclicals sector.

 

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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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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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