What to Expect in the Wake of the Global Selloff

Starting Monday, the president pushed back strongly against the nuclear ambitions of North Korea, resulting in the escalation of the conflict and increased market volatility. The VIX volatility index jumped up in response.

However, looking at the 10-year chart of the VIX, the equity market still has very low volatility and does not signal a serious geopolitical risk:

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Not surprisingly, the South Korean market responded negatively to the events, but in our view, the selloff did not break the long-term uptrend yet:

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The next question is, how much damage do we see in the US equity markets? While the selloff took market observers by surprise and many negative reports appeared in the financial media, we think that the long-term uptrend of the S&P 500 index is still intact, but it is at a tipping point:

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Furthermore, we also think that the long-term uptrend for the stock markets of the Southeast Asia region is still up, for now:

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How did the flight to safety investments perform during the selloff? First, let’s look at gold. Gold stocks rallied, but modestly. Our interpretation is that gold investors do not see a dramatic escalation of the Korean conflict yet:
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Also, Treasury yields are trending lower, which shows that the demand for US bonds, another traditional flight to safety play,  did not spike in response to South Korean threats:

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How does the chain of events impact the sectors of the market? We think that we are seeing a significant change of market leadership that was triggered by, but not caused by the Korean crisis. We also see an apparent shift in sentiment that can reinforce sector rotation.

First of all, as expected, defense and utilities, which are traditionally conservative investments, are still doing well:

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On the other hand, the price of crude oil is not improving, which leads to weakness in the energy sector:

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The selloff in technology, one of the market leaders in 2017, is modest:

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What to do next? In our opinion, the key is to follow the market-leading sectors and international investments in Europe and Asia. If they cannot recover from the selloff, we think that the whole market is in trouble, but if investors will start to buy the dip again, which worked so well for seven years, we would probably want to take a new look at the strongest sectors.

 

The sector screen used for this market analysis was provided by www.FidelitySectorReport.com.

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Sector Rotation: Automotive Stocks are Advancing Again

Last year was a tough year for car companies, but 2017 may become a turnaround year for the sector. We think that a combination of factors, such as new product cycles and the availability of relatively low-cost financing, will make this sector increasingly attractive again for investors.

Our investment of choice in this space is the Fidelity Select Automotive Fund (FSAVX), which provides diversification in the sector:

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Not surprisingly, the growth comes from innovators in the sector, such as Tesla:

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While traditional car companies are still struggling to increase financial performance:

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Another growth driver is the increased interest in used cars, which is fueled by the large supply of low milage cars coming off of short-term leases. Used-car dealers, such as Carmax, are benefiting from this trend:

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We identified the change of the long-term trend in the automotive sector using the momentum screen provided by Fidelity Sector Report. Click here to see more advancing sectors.

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Sector Rotation: Technology and Transportation Stocks Reverse; Flight to Safety Lifts Utilities and Consumer Sectors; New Market Leaders Emerge

The congruence of multiple market forces is causing sudden shifts in the stock market:

  • A dramatic sell-off of large cap technology stocks triggered a flight to safety with potential benefits to defensive sectors, such as utilities and consumer staples.
  • The decline of the dollar versus all major currencies causes rallies in both cyclicals and commodity stocks. The energy sector shows signs of bottoming and bullish turn-around.
  • Higher energy prices are hurting airlines and transportation stocks, in general.
  • International markets continue to be attractive choices for diversification.
  • The strongest sectors continue to advance.

Sector screen is provided by Fidelity Sector Report

Today, large cap tech stocks experienced a classical bearish reversal day: the technology-focused Nasdaq 100 index first made a new record high, but by early afternoon sold off on high volume:

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On the other hand, defensive sectors, such as consumer staples and utilities, are attracting attention from investors:

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The dollar continued to decline against all major currencies:

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Since commodities are priced in dollar-terms worldwide, the weakening dollar has contributed to the recent rally in commodities stocks:

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Another beneficiary of the weak dollar is the cyclicals sector, also known as the consumer discretionary sector. Many of the companies in this sector are large multinational companies with overseas earnings that become more valuable when the dollar declines.

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Increasing energy prices are helping energy stocks, but hurting the transportation sector.

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International investments in Asia and Europe continue to do very well in the current market environment:

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The strongest domestic sectors right now are the media, defense, and materials sectors:

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Market Correction: Why Investors Should Avoid Consumer Stocks

It all started on June 9 with investors selling Apple shares after a downgrade, and continued with more investors dumping their holdings in tech companies, such as Google parent Alphabet and Tesla, resulting in an unexpected correction in the technology sector:
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At the same time, already weak sectors, such as energy, saw new waves of relentless selling:

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More recently, consumer-related sectors have experienced a reversal of the previously bullish trend, as shown on the chart of the Fidelity Select Consumer Staples Fund (FDFAX). Companies in the consumer staples sector are traditionally considered stable investments and investors often use them as safe havens. The recent trend reversal is a worrisome new development in our opinion.

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The consumer discretionary, also known as consumer cyclicals, sector is also following the same pattern:

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Additional consumer cyclical sub-sectors, such as automotive and retailing, are also breaking down:

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While sectors, such as financials, industrials, and health care, are still holding up in the recent selloff, the weakness in consumer stocks may be a cautionary sign ahead of the seasonally weak fall months.

Visit fund ratings at FidelitySectorReport.com for more information.

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Sector Rotation: Top 3 Financial Sector Mutual Funds

Companies in the financial services industry, such as brokers and banks, have rallied impressively in the last few weeks. In our view, increased dividends and buy backs, and the prospect of deregulation can support a long-term bull market in the financials sector.

To find the best financial sector mutual funds for the current market environment, we utilized the fund ratings provided by our sister site, Fidelity Sector Report.

The top-rated fund is the Fidelity Select Brokerage Fund (FSLBX):

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Another strong performer is the Fidelity Select Consumer Finance Fund (FSVLX). FSVLX primarily invests in credit card companies and mortgage REITs:

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Our third favorite is the Fidelity Financial Services Fund (FIDSX):

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Correction in the Tech Sector: Best and Worst Sub-Sectors

The technology sector was the strongest performing sector for 12 month, but a correction started in early June due to questions about high valuations for Apple and other large-cap technology companies.  As a result, the technology-focused Nasdaq 100 index is underperforming the broad market now:
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The key question is whether investors will eventually step in to buy the dips, or not. While it is difficult to predict how the correction in technology stocks will end, in out view, staying with the strongest sub-sectors can help limit losses, while providing an opportunity to participate in the next rally.

To compare the relative strength of the six technology funds available from Fidelity, we used the momentum screen provided by Fidelity Sector Report. The fund with the strongest momentum and the most bullish chart is the Fidelity Select IT Services Fund (FBSOX):

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We also like the Fidelity Select Technology (FSPTX) and the Fidelity Select Software & IT Services (FSCSX) funds.

The weakest technology sub-sector is semiconductors by consistently underperforming the Nasdaq 100 index this year. The chart below shows that the Fidelity Select Semiconductors Fund (FSELX) has a negative chart pattern and is not likely to lead the next technology rally:

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