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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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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