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.
View fund rankings at FidelitySectorReport.com
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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.
View fund rankings at FidelitySectorReport.com
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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.
View fund rankings at FidelitySectorReport.com
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Out of the four major U.S. indexes, the small-cap Russell 2000 is the first one to surpass the January high and reach an all-time record level:
We view the relative outperformance of small-cap companies a positive development for the overall market. Small companies are responsible for most of the job creation in America and their strength signals a vibrant and growing economy.
Several large-cap sectors that are not impacted by the stronger dollar and by the rising interest rates are also performing well. Click here for a list of the top-rated industry groups.
Based on our technical screen, we like the Fidelity Small Cap Growth Fund (FCPGX) the most in the current market environment:
One of our long-time favorites, the Fidelity Low Priced Stock Fund (FLPSX) is also performing well:
View fund rankings at FidelitySectorReport.com
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Strong earnings and a potential breakthrough in the negotiations with North Korea made investors feel more cheerful and caused a broad rally in the stock market.
Equity markets around the globe rallied in recent days, but the U.S. market continues to be the leader.
Rising tensions in the Middle-East and the strengthening dollar resulted in the energy and natural resources sectors becoming the strongest performers in the last three months (see article):
Large-cap real estate stocks also rallied, as we highlighted earlier (see more):
We also like the bullish trends in technology, medical devices, and financials sectors:
View fund rankings at FidelitySectorReport.com
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Real estate stocks have been lagging the market due to concerns about rising interest rates. However, with long-term Treasury yields stabilizing in the 2.95 – 3.20% range, we see a new opportunity to look at the real estate sector.
The chart shows that the Fidelity Real Estate Fund (FRESX) broke out and cleared its 100-day moving average, which we use as an indicator of seasonal trends.
International real estate looks even more attractive, as the long-term bullish trend continues to be in place:
The long-term bullish trend of the Fidelity Real Estate Investment Fund (FIREX) remains intact.
View fund rankings at FidelitySectorReport.com
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Defense stocks surged on April 7, following the first U.S. strike to punish the Syrian regime. We think that we will likely see a similar response by investors following last night’s airstrike on chemical weapons facilities in Syria.
The Fidelity Select Defense and Aerospace Fund (FSDAX) has outperformed the broad market for more than a year. We anticipate that the strong trend will continue in the wake of allied airstrikes in Syria.
We also think that the increased risk of escalation of the Syrian conflict and the potential for disruption of oil production could lead to higher oil prices and the continuation of the bullish rally for energy stocks.
The price of the West-Texas Intermediate Crude Oil (WTIC) could reach the $70 per barrel mark next week in response to increased geopolitical risks.
The energy sector experienced a 20% correction at the beginning of 2018 but seems to be recovering again in response to higher oil prices. The Fidelity Select Energy Fund (FSENX) could be a great way to play this trend.
View fund rankings at FidelitySectorReport.com
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The stock market started the second quarter with heavy selling. The S&P 500 index dropped by more than 2%:
Technology and consumer discretionary stocks led the sell-off, including Intel (down -6.07%), Amazon (down -5.21%), Netflix (down -5.10%) and Facebook (down -2.75%).
Not surprisingly, mutual funds with large holdings in these names declined the most today:
Investors were selling other high-risk assets too, such as biotechnology shares:
With the dollar no longer falling versus the major currencies, international investments in Europe and Asia are becoming less attractive, as well:
Remarkably, all sector funds closed down today. In our view, this rare occurrence may signal a significant shift in investor sentiment towards a more bearish stance.
The momentum rankings of Fidelity sector funds show that the defense sector and some sub-sectors of technology are the strongest relative to other sectors:
Furthermore, the charts below show that both the Fidelity Select Defense and Aerospace Fund (FSDAX) and the Fidelity Select IT Services Fund (FBSOX) stayed above their respective 100-day moving average.
We use the 100-day moving average to assess the direction of seasonal, or intermediate-term, trends. The only other Fidelity sector fund that is above its 100-day moving average is the Fidelity Select Utilities Fund (FSUTX):
Overall, in our assessment, most sectors that make up the U.S. stock market are turning bearish in the short to intermediate-term timeframe, which could lead to further downside risk.
View fund rankings at FidelitySectorReport.com
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After the unexpected correction last week, the U.S. equity market rallied back in the last three days, in spite of fears of rising interest rates and inflation:
Based on the three-month total return, which is a measure of price momentum, the consumer cyclicals (such as retail), industrials (such as defense) and the financials (such as banking) sectors led the market higher:
We continue to like the technology sector, as well. In fact, the only sector fund that made a new all-time high today is the Fidelity Select Communications Equipment Fund (FSDCX), which represents a sub-sector of the broader technology sector:
View fund rankings at FidelitySectorReport.com for more information.
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In January the stock market became dangerously overbought following the tax reform rally, and as we anticipated, a sell-off occurred:
Chart 1.
The sell-off was triggered by rising interest rates, fears of rising inflation, and the potential of a more aggressive monetary policy by the Federal Reserve.
A worrisome sign for the stock market is that shorter-term interest rates are rising faster than long-term rates, which could lead to yield curve inversion, a condition where short-term rates are higher than long-term interest rates. The bottom panel of Chart 2. shows the ratio of the 10-year vs. 30-year yield indexes. The ratio line is steadily rising since last July, as denoted by the blue arrow:
Chart 2.
Rising interest rates negatively impacted funds that invest in this space:
Chart 3.
The stock market sell-off is uneven with some sectors falling faster than others. Currently, the spread of the total return between the best and the worst sectors over the last three months is 25%. Should the market continue to drop, we think that this spread will continue to widen. Conversely, if we see a relief rally by mid next week, the spread will probably become more narrow.
Chart 4.
The industry groups with the strongest relative strength vs. the S&P 500 index are the cyclicals (consumer discretionary), financials and industrials. We’d like to highlight financial services and defense stocks (part of the industrials group) as two sectors that can potentially lead the market once the market correction ends.
Chart 5.
Chart 6.
Chart 7.
We continue to like the technology sector, as well, because of its lesser dependence on changes in interest rates and because of the proliferation of disruptive technologies from robotics to intelligent software:
Chart 8.
View fund ratings at FidelitySectorReport.com for more information.
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Fidelity Trends 