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:
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):
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:
The technology sector, led by Apple, semiconductor and large cap Internet companies, has become one of the leading equity sectors in 2015
Rising interest rates resulted in a trend reversal for the utility sector
The strengthening dollar and declining energy prices cause the natural resources sector to resume its decline
The Nasdaq index (where many of the market-leading technology companies are listed) closed above the historically important 5,000 level yesterday. This level has not been seen since the dot com bubble of 2000. This time around, we think that the bull market in the technology sector is sustainable and stock prices will go higher from here.
One of the best ways to participate in this trend for Fidelity mutual fund investors is by building a position in the Select Technology fund (FSPTX). The top portion of the chart below shows that the relative strength of FSPTX compared to the S&P 500 has turned positive in 2015, which is a very bullish sign:
Steadily rising long-term Treasury rates caused a sharp sell off in the interest rate sensitive utilities sector. The chart of the Fidelity Select Utilities Fund (FSUTX) shows that the sector is not participating in the stock market rally and has broken its long-term uptrend:
In a previous article we warned that it is too early to invest in the natural resources sector. In spite of the rally in January, this sector continues to be in a downtrend and we think that there are many better investment opportunities in this market.
The Fidelity Magellan Fund (FMAGX) and several other Fidelity sector and international funds experienced large percentage drops of their Net Asset Value (NAV) at the end of the Friday trading session due to the distribution of capital gains. Investors will receive the distributions on the “pay date”, which is Monday, December 8. For more details click here.
Here are a few examples of Fidelity funds with large price drops: