Sector Rotation: Technology Sector Outperforms in 2015; Avoid the Utilities and Natural Resources Sectors

Summary:

  • 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:

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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:

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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.

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Read more about investment strategies involving these funds at FidelitySignal.com

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Long-Term Bullish Trend is Intact for U.S. Equities, in spite of Increased Volatility; Gold Forms a Bullish Double-Bottom Chart Pattern; It is Still Early to Invest in the Energy Sector or in International Equities;

It is always good to take a look at long-term trends when short-term volatility increases, in order to have a better sense of the market direction. While the widely anticipated stock market correction remains a possibility, in our view, the long-term bullish trend for U.S. equities is still intact.

The chart shows that the multi-year uptrend for the benchmark Fidelity Spartan U.S. Equity Index Fund (FUSEX) has not yet been interrupted by the recent market volatility:

fusex

In a recent article (see Best Fidelity Mutual Funds for 2015) we highlighted the most attractive investments for 2015. The selected mutual funds have continued to perform well in the last few weeks of trading. Especially, conservative sectors, such as real estate, utilities, medical equipment and consumer staples have outperformed the S&P 500 index:

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Perhaps, the most interesting new development in 2015 is the renewed interest in buying gold mining stocks. The chart of the Fidelity Select Gold Fund (FSAGX) below shows a short-term bullish double bottom pattern and increased buying activity during the first two weeks of the New Year. However, gold has a long way to go before it can establish a long-term uptrend.

While gold is traditionally viewed as an inflation hedge, in the current deflationary environment precious metals are looked at as an alternate asset class that can potentially serve as a volatility hedge. We’d like to caution investors, that while gold can provide returns that have low correlation with equities, this sector is highly speculative and is more appropriate for the purposes of short-term trading than long-term investing.

fsagx

As noted in earlier articles, we believe that it is still too early to diversify into the weakest sectors, such as natural resources (in particular energy), and into underperforming international markets.

The blue lines on the charts of the Fidelity Select Energy Fund (FSENX) and the Fidelity Latin America Fund (FLATX) indicate that the bearish downtrends that are still in place:

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Read more about investment strategies involving these funds at FidelitySignal.com

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Sector Rotation Intensifies as we Approach the Seasonally Weak April-May Period

“Sell in May and go away” is a well know Wall Street adage that warns investors to sell their equity holdings in May to avoid the seasonal decline of the equity markets. Will the adage prove to be true in 2014? After the outstanding returns of the last 18 months, is the U.S. stock market vulnerable to a serious correction?

We think that the risks for equities have increased and investors should be extremely cautious in this market. As we noted in previous blog articles, the sector rotation has started a week ago and a correction is under way in the previous market-leading sectors, such as biotechnology and gold. At the same time, defensive investments, including utilities and treasury bonds are in favor again. Geopolitical risks may be on the rise, as well, especially if the military conflict in the Ukraine escalates in the coming weeks.

Severe corrections are under way in the biotech and gold sectors:

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At the same time, defensive sectors, such as utilities are gaining favor with investors:

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Source: FidelitySignal.com

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The Global Equity Sell-off Resumes in February; Treasury Bonds Rise; Utilities are Holding in Bull Market

The stock market sold off today with an accelerated pace in part due to the weak PMI number from China. The benchmark Fidelity Spartan U.S. Equity Index Fund (FUSEX) crossed below its 100-day moving average, which is considered a bearish sign:

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The weakest equity sector was the financials. The Fidelity Select Brokerage Fund (FSLBX) was down the most with a -3.52% loss for the day:

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The weakest Fidelity international equity fund was the Latin America Fund (FLATX) with a -3.42% loss. Equity markets in Latin America have experienced a tremendous bear market for more than a year now and are severely oversold. We expect a relief rally to happen in the near future.

flatx

Long-term yields continued to decline and investors bid up bonds in a flight to quality. As the result, the Fidelity Spartan Long-Term Treasury Bond Fund (FLBIX) gained 1.12% today:

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One of the few sectors that still remain in a bull market is utility stocks, which are considered defensive investments. The Fidelity Select Utilities Fund (FSUTX) lost -1.27% today, but the chart shows that the bullish uptrend for FSUTX has not been interrupted yet:

fsutx

Source: FidelitySignal.com

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