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:
The S&P 500 index continues to climb in September, in spite of worries about multiple potential trade wars:
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):
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:
The new market-leading sectors are health care, real estate, utilities and consumer staples:
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:
The rapid decline of the Turkish Lira and an unstable geopolitical environment caused an exodus of investment capital from Turkey:
The U.S. dollar continues to appreciate steeply against all major currencies, as investors are buying safe-haven investments denominated in the dollar.
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:
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.
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.
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.
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:
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.
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.
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.
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:
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.
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.