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:

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:

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

Gold miners and utilities are holding up the best:

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:

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:

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:

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

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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Large Price Drops of Multiple Fidelity Funds are Caused by Capital Gains Distribution

The large price drops of several Fidelity funds at the end of the Friday trading session were due to the distribution of capital gains, which happens periodically. The details are provided by Fidelity at https://www.fidelity.com/mutual-funds/information/year-end.

Here are a few examples:

 

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Equities React Positively to the Outcome of the Mid-term Elections; Real-estate, Telecom, Utilities, and Healthcare Providers Funds Advance

Both the U.S. and the international markets reacted positively to the outcome of the mid-term elections with all major sectors rallying today. International markets rallied strongly, as well. Investor sentiment turned positive too, while consumer spending remains high. As we wrote previously, we’d like to see a strong December rally that can continue into the first quarter of 2019.

We’d like to highlight the Fidelity Real Estate (FRESX) and the Fidelity Telecom (FSTCX) funds today:

 

We continue to like the Fidelity Utilities (FSUTX) and the Fidelity Healthcare Providers (FSHCX) funds:

 

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Global Stock Markets in Turmoil; Crash-like Conditions can Develop Unless We Get a Bounce Soon

The VIX volatility index (often called the fear indicator) spiked in the last few days, reflecting a deteriorating investor sentiment:

Global markets started out on a good note in the morning, but reversed by the afternoon. One of the few bullish international markets, the Brazilian stock market, broke out of the trading range in the morning due to the election win of an anti-establishment presidential candidate. Unfortunately, the gains turned negative by mid-day and closed below the close of the previous day on high volume. This price pattern is called the bearish outside reversal, not a good sign for Latin American markets.

Argentina and Mexico, the other two large Latin American markets are already in bear market territory:

European markets are also declining steeply. Interestingly, following Angela Merkel’s statement about not seeking re-election as her party’s leader resulted in a small rally in German equities. In spite of that, the stock market of the strongest economy in Europe is clearly in a negative trend:

Another disappointment was the performance of the technology-heavy Nasdaq index. The chart of the Nasdaq 100 tracking ETF (QQQ) shows the same bearish outside reversal pattern:

The large-cap S&P 500 index is also deteriorating and seems to be heading to the February low:

Looking at the relative performance of sectors, the results are unusually negative with only a handful of sectors producing small positive returns over the last three month period:

Perhaps the only sector that is in a reasonable uptrend is utilities, which in our interpretation shows a very defensive investor sentiment:

In our survey, the semiconductors sub-sector is the weakest, and we think that it still has room to fall:

On the other hand, materials, another lagging sector, is highly oversold based on the RSI indicator and could be ready for a short covering rally:

 

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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:

The bear market in international equities, both Europe and emerging markets, accelerated to the downside:

Clearly, smart money is rotating into defensive sectors, while technology, cyclicals, and materials continue to underperform.

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:

The relative strength for the telecom and the healthcare sectors is also positive:

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:

 

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: Conservative Sectors are the New Market Leaders

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:

 

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Why are Emerging Markets Declining?

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.

 

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