Sector Rotation: Electronics, Medical Equipment and Real Estate Funds are Top Performers

The S&P 500 index has reached an all time high again, as the bull market resumed after a brief correction in March. The top 10 Fidelity mutual funds in the current market environment show representation from multiple industries and this broad-based advance is considered a bullish sign for the overall market.

We’d like to highlight three Fidelity funds here, the Fidelity Select Electronics (FSELX), the Fidelity Select Medical Equipment (FSMEX) and the Fidelity Real Estate Portfolio (FRESX) funds. These funds stand out, because their respective sectors are well positioned to lead the market advance.

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Sector Rotation: Real Estate, Healthcare, Technology and Gold Funds are Emerging as the Strongest Investments in the Current Market Environment

While the benchmark Fidelity Spartan U.S. Equity Index Fund (FUSEX), which is Fidelity’s S&P 500 index fund, barely moved higher today, multiple sector funds continue to show increased relative strength and may become promising equity investments for the next weeks or months. The first chart shows that FUSEX bounced off of the blue support line following the January market sell off and just barely holding above the 100-day moving average:

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The next chart shows that Fidelity Real Estate Fund (FRESX) is one of the most interesting opportunities to watch for in the next few weeks. The top part of the chart displays the relative strength, which is the ratio of FRESX versus the S&P 500 index. The blue arrow indicates that the relative strength is improving for this sector starting from the beginning of January. Indeed, FRESX did not correct as much as FUSEX in the recent sell off and has already broken out to a new high for the year. The 1-year chart also shows that FRESX has not yet established a clear bullish trend, but the price action is promising.

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The long-term picture for the technology and healthcare sectors is very different from real estate, as these large sectors have performed very well last year, but did not correct hard in January, and their relative performance compared to the broad market indexes continue to improve. Fidelity has multiple select funds for both of these sectors. We show here two examples of health care funds (FSPHX and FSMEX), which continue to provide excellent returns:

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The following two charts show examples of two Fidelity technology funds (FSELX and FSPTX) with increasing relative strength and promising outlook:

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One of the most interesting recent developments has been the strong rally of gold mining stocks. As the result, the Fidelity Select Gold Fund (FSAGX) has gained 11.74% already this year.  The five year chart below shows that FSAGX reached its peak in 2011, but dropped in the following year and a half by almost 68% to reach the most recent low in last December. The blue downtrend line appears to be broken now, but since the gold mining sector can be highly volatile, investors should be very cautious with taking large positions in this sector until a clear uptrend gets established. For example, in the second half of 2012 gold made a similar bullish move, but resumed its bear market for another year:

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Source: FidelitySignal.com

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Top 10 Fidelity Sector Funds For The Summer Rally

Fed chairman Bernanke’s comment last week stating that the Fed’s policy will be highly accommodative for the foreseeable future led to an across-the-board rally for the U.S. stock market. The market looks decidedly bullish, with many sectors breaking out to new highs.

On the other hand, we are in the middle of the earnings season, which is often associated with increased volatility. Given the current market environment, what are the best investment choices for Fidelity investors?

To answer this question, first lets look at the data. The table below shows the ranked list of the top 10 Fidelity mutual funds based on three-month return, a measure of price momentum.

Top 10 Fidelity Mutual  Funds

Top 10 Fidelity Mutual Funds

Source: FidelitySignal.com

Surprisingly, all of the Fidelity funds on the top 10 list are sector funds. This is highly unusual. Even a few months ago, we would have seen international funds (e.g. Japanese funds) or other investment choices on this list. Even beaten down sector funds, such as the Fidelity Real Estate Investment Fund (FRESX), are now turning bullish. Consequently, the data tells us that smart money is on U.S. sector investments right now.

The second observation is that the list of top Fidelity funds is highly diversified. In addition, all of the ten funds have returned more than 10% in the last three months, in spite of the recent market correction.

The current leaders are the Fidelity Select Automotive (FSAVX), the Fidelity Select Biotechnology (FBIOX) and the Fidelity Select Banking (FSRBX) funds. In addition, it is important to note that four out of the ten funds are related to the finance sector.

Companies investing in the consumer sector are also bullish. The best fund to play this trend is the Fidelity Select Retailing (FSRPX) fund.

For investors who are looking for emerging trends in technology, the Fidelity Select Software and Computers (FSCSX), the Fidelity Select IT Services (FBSOX) and the Fidelity Select Electronics (FSELX) funds offer new opportunities.

Buy/sell signals for Fidelity funds are available at FidelitySignal.com