Black Christmas and the Crash of the U.S. Stock Market; Gold and Oversold Sectors Offer the Best Trading Opportunities

The S&P 500 index dropped 2.64% yesterday and lost more than 20% of its value compared to the recent peak:

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In previous articles, we described that crash-like conditions were developing. In our view, we are witnessing a slow-motion stock market crash that possibly forecasts a global economic slowdown.

Yesterday, the panic selling impacted almost all asset classes, with the exception of gold and Treasury bonds, which are traditionally viewed as “flight to safety” trades.

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In our view, the most oversold sectors will likely bounce in the coming days and may offer a short-term buying opportunity to aggressive traders.

To identify the most oversold sectors, we use the Relative Strength Index (RSI) indicator. When the value of the RSI is less than 30, we regard the investment as oversold (denoted with blue circles on the charts). When the RSI is less than 20, the investment becomes highly oversold.

Out of the 11 largest U.S. sectors, the energy, the industrials, the consumer staples, and the financials dropped the most yesterday, while also triggering the highly oversold condition:

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The real estate sector is oversold, as well, and we think that this sector also has the potential for a short-term rally:

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The Stock Market Reacts Negatively as Fed Raises Interest Rates; Oversold Sectors are Ready for a Bounce

The broadly followed S&P 500 index continued its slide and it is now below the February low:

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The Fed’s comments in combination with rising fears of a global economic slowdown negatively impacted the credit markets, as well. The chart shows that the ratio of the 5-year and 2-year U.S. Treasury notes is below 1 now. This condition is referred to as inversion of the yield curve, which may signal that the risk of a recession is higher than previously thought:

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Almost all sectors show a negative performance for the last three months:

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Gold miners and utilities are holding up the best:

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We think that highly oversold sectors, such as banking and energy services, are ready for a bear market rally:

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Will the Stock Market Crash? Natural Resources, Industrials, and International Markets are Already in Bear Market Territory

The S&P 500 index broke below its trading range Friday, which is the latest sign of the deterioration of the U.S. stock market:

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Investor pessimism is driven by the slowing growth of the global economy, rising interest rates, trade wars, the Brexit negotiations, and several other geopolitical factors. We think that we are at an inflection point and crash-like conditions can develop quickly.

A worrisome sign for us is the lack of sector leadership. Gold is the only sector that shows a positive return for the last three months:

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While the Fidelity Select Gold Fund (FSAGX) has outperformed recently, the chart does not show a bullish price pattern yet. FSAGX will have to break above the long-term trendline to start a new bullish trend:

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On the other hand, the chart patterns of the weakest U.S. sectors, such as energy and industrials, are very negative:

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In a previous article, we described the turmoil in global markets. European and Emerging Markets continued to deteriorate since then and do not offer investment opportunities at this point in our view:

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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: 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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