Stock Market Correction: Own the Best Fidelity Funds to Avoid Volatility

Stock market volatility continued today, with the S&P 500 index and all other major U.S. equity indexes either approaching correction territory or already in it. The increase of the volume during the sell-off is disconcerting and may indicate deleveraging by large hedge funds and institutional investors.

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As the equity market correction has been unfolding, in previous articles I have highlighted the “falling knives”, the investment areas that prudent investors should avoid. The two weakest investment areas continue to be Euro stocks and energy/natural resources sectors.

Relentless selling has caused tremendous drops already. Consequently, I would not be surprised to see a violent relief rally taking place in these highly oversold markets in the near future.

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While equity markets experience their first serious disruption since the panic of the August 2011 credit-rating downgrade of the U.S. debt, it is worth taking a look at other financial markets, as well.

Most notably, and unexpectedly, interest rates of the long-term Treasury bonds continue to decline rapidly. Paradoxically, as the Federal Reserve has tapered off its bond-buying program, demand has increased for U.S. Treasury bonds, pushing the yield lower. However, this effect is exacerbated by increased reserve requirements for banks and, more recently, the “flight to quality” due to the equity market correction.

Nonetheless, since financial markets often forecast economic conditions 12 to 18 months into the future, the rapidly declining interest rate of long-term Treasuries is probably not a good sign and may signal that the bond market is anticipating economic contraction in 2015 and beyond.

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One of the confounding factors of market action has been the rapid rise of the dollar against all major currencies from August through October. Many commentators have attributed changes in the market to the strengthening of the dollar, however, since the beginning October, the dollar has pulled back and no longer appears to play a key role in determining stock market dynamics. A further weakening of the dollar from these levels could potentially help U.S. multinational companies to report improved earnings in early 2015.

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Commodities, as a group, have experienced a huge deflation since July. Energy and metals are the weakest, while some agricultural commodities are showing signs of bottoming out.

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Perhaps the only silver lining in the commodities space right now is silver, and of course gold, as these two metals are highly correlated. After a devastating decline staring in September 2011, gold bullion bottomed out in July 2013 and has been in a wide trading range ever since.

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I’d like to highlight here two conservative investments, which have worked well throughout 2014, regardless of market volatility. The first one is the Fidelity U.S. Bond Portfolio (FBIDX). FBIDX is a highly diversified bond fund that is appropriate for conservative investors.

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My top pick for the current market environment is the Fidelity Spartan Municipal Income Fund (FHIGX). Its low volatility and a tax-equivalent 3.55% yield continues to make FHIGX a very attractive investment choice.

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A word of caution for bond investors: unfortunately, not all bond funds have done well since the market correction started. High-yielding corporate bonds tend to track the stock market trends more closely than the interest rate trends, and are in a decline now.

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New Investment Trends: Latin American Equities can Turn Hot Again; Municipal Bonds are Shining in 2014

Long time observers of the financial markets know that the top investment areas from last year are often become laggards the next year, and vice versa. This year is no exception. Last year’s market leaders, which include social media, biotechnology and solar energy stocks are struggling to gain momentum, while new investment opportunities are emerging in unexpected ways.

One of our favorites is the newly emerging bullish trend in Latin American equity markets. Economic and social challenges are highly publicized for countries in the region. However, the chart pattern for the Fidelity Latin America Fund (FLATX) is turning bullish. Markets can anticipate changes in underlying economic conditions 6 to 12 months into the future. If this is the case for Latin American stock markets, then this may be a perfect time to take initial positions.

The top panel of the chart below plots the ratio of FLATX and the S&P 500 and we can see the reversal of last year’s underperformance by FLATX. The bottom panel shows the bullish chart pattern of FLATX breaking a long-term downtrend, and after a few weeks of consolidation, beginning to move higher:

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The second emerging trend is in municipal bonds. Investors got weary of the news last year both about the bankruptcy of the city of Detroit and the potential default of the government debt of Puerto Rico, which brought the municipal bond market down. But this year is different. The Fidelity Spartan Municipal Income Fund (FHIGX) shows a bullish breakout by making a new high above the resistance level:

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The long-term chart of FHIGX shows that this emerging new trend in the municipal bond market can become a great way for investors to diversify:

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

 

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Gold stocks loose their luster

The last two days of panic selling in the financial markets around the globe brought gold stocks back to their trading range diminishing hopes for gold-related equity investments to serve as safe havens in the highly turbulent markets. A fresh breakout from the trading range will be needed to reassert gold investments as market leaders.

The data tells us that in the current market environment gold stocks no longer provide a hedge against losses in the stock market. Furthermore, the extent of the drop (see chart below) tells us that gold stocks are extremely risky investments right now. A risky investment that does not serve as a hedge against market downturns do not sound like a good deal for us.

Fidelity Select Gold fund (FSAGX, down -6.99%) regressed to its mean after a false breakout.

The Fidelity Select Gold fund (FSAGX, down -6.99% today) regressed back to its mean after a false breakout.

Mutual fund screens are provided by FidelitySignal.com