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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A Bullish Case for the Market: The Strongest Sectors are Getting Stronger

Summary

  • While the S&P500 index pulled back in the last six weeks, the leading sectors continue to advance.
  • We expect to see additional trading opportunities in the next few weeks in the technology, utilities, cyclicals, consumer staples, and industrials groups.
  • Our technical screen shows that real estate and health care can also strengthen.
  • It is best to avoid weak sectors that continue to weaken, such as energy and financials.

 

The benchmark S&P 500 index pulled back from its all-time record since early March, but volatility stayed low in spite of geopolitical uncertainties in Syria and on the Korean peninsula. In our view, any improvement in the outlook for tax or regulatory reform in Washington can serve as a catalyst to spark a broad-based stock market rally.

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In the section below we review the strongest industry groups that we think are worth watching closely in the next few weeks.

Technology: The strongest sector fund in this group is the Fidelity Select Technology Fund (FSPTX). FSPTX has been one of the best performing Fidelity funds in the last 12 months and it continues to advance:

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Utilities: The Fidelity Utilities Fund (FSUTX) is regarded as a conservative investment, but has appreciated in price considerably due to interest rates trending lower:

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Cyclicals: Economists usually rejoice when consumers increase their spending on goods and services since it shows that the economy is on a strong footing. One of our favorite investments in this space is the Fidelity Select Leisure Fund (FDLSX). FDLSX has turned from a market performer to an outperformer in the last two weeks and the technicals continue to be very bullish:

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Industrials: We highlight only the Fidelity Select Defense and Aerospace Fund (FSDAX) here as one of the top investments in this space, but we think that the whole industrials group can be interesting going forward.

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Consumer staples: Another conservative investment and can generate solid returns:

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Weak sectors, which are underperforming the broader market include the Energy and the Financials groups. Here we show two examples, the Fidelity Select Energy Services Fund (FSESX) and the Fidelity Select Banking Fund (FSRBX). Both funds are below their respective 100-day moving averages and show a negative price pattern:

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