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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Can International Markets Outperform the U.S. Stock Market in 2017?

A sharp sell-off in the Brazilian stock market spooked investors two days ago. The sell-off came after bribery allegations surfaced against the president of Brazil:

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The plunge in Brazilian shares did not spread to international markets in Europe and Asia, which highlights the importance of diversification.

The chart of the Fidelity Diversified International Fund (FDIVX) shows that international markets are outperforming the S&P 500 index since March, as shown by the FDIVX:$SPX ratio line pointing up (see blue arrow in the bottom panel):

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Top 5 Sector Funds after the Market Sell-off

The U.S. stock market partially recovered in the last two days from the worst sell-off of the year. The sell-off was caused by turmoil in Washington, which centered around accusations of president Trump obstructing justice.

The chart below shows that the sharp drop of the S&P 500 index occurred on high volume, which was the reflection of panic amongst disoriented investors:

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After the rebound, the weakest sectors, which include energy, banking, and transportation, continued to stay weak. On the other hand, the strongest sectors were not impacted much:

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We used the technical screen provided by Fidelity Sector Report to identify the safest sectors to invest in after the market sell-off.

The criteria for the screen included strong long-term and short-term price trends, and improving relative strength compared to the S&P 500 index.

The top 5 sector funds are:

  • Fidelity Select Technology Fund (FSPTX)
  • Fidelity Select Leisure Fund (FDLSX)
  • Fidelity Select Wireless Communications Fund (FWRLX)
  • Fidelity Select Environments Services Fund (FSLEX)
  • Fidelity Select Consumer Staples Fund (FSDAX)

Here are the charts for the top sector funds:

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Consumer Cyclicals are Hot Again; Why are Retailers Attracting Long-Term Investors

In a previous blog post we wrote about the strong performance of the consumer discretionary (cyclicals) sector:

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Chart 1. The Fidelity Select Consumer Discretionary Fund (FSCPX) performs strongly in 2017

On the other hand, it seems to be important this year to select the right sub-sector within the large cyclicals group. For example, as we observed earlier,  media stocks turned negative, while the leisure sub-sector has turned red-hot.

A third investment choice to consider is the retail sub-sector, which is often overlooked due to recent weak earnings and store closures by brick-and-mortar retailers, such as Macy’s.

We argue here that while online retailers, such as Amazon, have gained market share, consumer spending overall continued to be strong. That’s why we like the Fidelity Select Retailing Fund (FSRPX):

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Chart2. The Fidelity Select Retailing Fund (FSRPX) performs strongly in 2017, in part due to investing in both online and brick-and-mortar retailers.

Looking at the long-term picture makes it even more compelling to invest in the retail sub-sector:

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Chart 3. The five-year chart of the Fidelity Select Retailing Fund (FSRPX) shows that a long-term bet on increasing consumer spending has worked very well.

 

Click here to see the best and worst sector funds. The ratings are provided by FidelitySectorReport.com.

 

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Sector Rotation: Telecom Stocks Turn Negative

Weak earnings, fierce competition, and confusion about the value of new product offerings have contributed to the under-performance of the telecom sector in 2017.

Chart 1. shows that the price pattern of the Fidelity Select Telecommunications Fund (FSTCX)  turned negative earlier this week. We think that investors may be best served by avoiding this sector until the current consolidation phase completes.

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Chart 1.

Get more trading signals at www.FidelitySignal.com.

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Sector Rotation: Is it Time to Take Profits in High-Soaring Media Stocks?

According to economic cycle theory, the economy follows a regular cycle moving from recession to recovery, and back into recession over a period of several years. Historic studies have shown that when the economy starts to recover from a recession, the consumer discretionary sector (cyclicals) is often the first to make gains closely followed by technology and industrials.

While we have not had a recession since the stock market low in 2009, the strong performance of the technology, consumer cyclicals (see Chart 1.) and industrials sectors in the last six months have raised the possibility of starting a new market cycle without a serious correction.

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Chart 1.

Starting a new market cycle without even a relatively small correction is a possibility, but would be very unusual. That is why we are on the lookout for early signs of a market pullback.

One of the cautionary signs is that media stocks, an important sub-sector of the consumer discretionary sector, reversed their uptrend today (see downgrade by FidelitySectorReport.com) due to multiple companies reporting a significant fall in advertising revenues:

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Chart 2.

The strongest sub-sector in the consumer discretionary space now is the leisure sub-sector (see Chart 3.) with names like Starbucks, Las Vegas Sands, and Marriott. We think that leisure stocks are long-term bullish, but short-term overbought, ready for a pullback:

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Chart 3.

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Global Equity Markets Rally; The Market is Climbing the Wall of Worry

Summary

  • A huge global equity rally is under way following the first round of the French election.
  • U.S. stocks also rallied. The NASDAQ index surpassed the psychologically important 6000 level for the first time.
  • New sector breakouts can provide “catch up” trade opportunities.
  • Geopolitical and domestic conflicts can derail the global rally, but so far the markets are climbing the “wall of worry”.

 

In our previous blog post, we made a bullish case for the equity market. The global rally did indeed start yesterday after the results of the first round of the French presidential elections were announced, as traders placed bets on a market-friendly outcome of the final election in early May.

The French stock market rallied strongly in response to the election results on Monday and today. What’s even more interesting is that the volume of the iShares MSCI France ETF (EWQ) spiked on Friday before the results were announced:

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The rally spread to almost all international markets, including emerging markets:

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U.S. stocks rallied, as well, with the S&P 500 index breaking above the downtrend line decisively:

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The Nasdaq index, which is primarily driven by growth companies in the technology sector, broke above the psychologically important 6000 level today.

Why is this level important? Many investors remember breaking the 5000 level at the peak of the dot-com bubble in 2000. Valuations are much more reasonable today, but it is amazing that it took 17 years for the Nasdaq index to make the next milestone, after moving above the 5000 level last summer:

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The technology sector continues to lead the market, but the rally is broad based. A new development is that Health Care sub-sectors are moving higher in the momentum ranking:

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The materials sector is also strengthening. The new breakout for the Fidelity Select Chemicals Fund (FSCHX) represents a “catch up” opportunity to participate in the rally:

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The Fidelity Select Health Care Fund (FSPHX) has also made a new high:

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Books describing the history of the stock market are filled with examples of the markets climbing the “wall of worry”. This expression refers to situations when equities advance, in face of known and real dangers that can derail the advance.

It seems that the current market environment is not unlike of the historic examples. Heightened geopolitical tensions on the Korean peninsula and in the Middle East, ongoing budget ceiling negotiations in Washington, trade disputes with Canada, and unexpected earnings surprises can negatively impact market sentiment within a short time.

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