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:

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:

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.

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:

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

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The Best Fidelity Mutual Funds for 2015

Summary:

• Economic conditions continue to favor real estate investments
• Municipal income and mortgage securities can provide an alternate source of income for bond investors
• Style rotation: value investing is likely to outperform growth stocks in 2015, just as small caps have the potential to outperform large caps
• Gold has not yet emerged as a good choice for diversification
• It is too early to invest in the energy sector or in international equities

The slowly improving U.S. economy and low interest rates have created a favorable environment for real estate investments. The Select Construction and Housing Fund (FSHOX) and the Real Estate Income Fund (FRIFX) are two excellent Fidelity funds, which allow investors to participate in this trend. The blue arrow in the top panel of the chart below shows that FSHOX has a positive relative strength compared to the S&P 500 index, because FSHOX has outperformed the S&P 500 index since August of 2014. Similarly, FRIFX has outperformed the benchmark Fidelity Spartan U.S. Bond Index Fund (FBIDX).

As the U.S. economy continues to improve, the Fed may start to increase interest rates in late 2015 or early 2016. In a rising interest rate environment bond investors may find it increasingly difficult to identify income funds that do not decline in value. As an example, the Fidelity High Income Fund (SPHIX) has already started to decline:

Two income funds that can outperform in 2015 are the Fidelity Spartan Municipal Income Fund (FHIGX) and the Fidelity Mortgage Securities Fund (FMSFX). The current yield of FHIGX is 3.54%, while FMSFX yields 2.49%.

Style rotation refers to the periodic over and under performance of different investment styles, such as growth vs. value, or large cap vs. small cap. For most of 2014 growth has outperformed value investing, and large caps have outperformed small caps. In 2015, we think that these relative trends can easily reverse. Two Fidelity funds, which can help investors to participate, are the Fidelity Value Fund (FDVLX) and the Fidelity Low-Priced Stock Fund (FLPSX):

Investing in gold mining stocks can provide an attractive opportunity for portfolio diversification. Of course, the best time to invest in the gold mining sector is when it is not declining. Unfortunately, that is not the case right now. However, should this trend reverse, the Fidelity Select Gold Fund (FSAGX) is an excellent mutual fund for investing in this sector.

The history of the stock market shows that the weakest investments in one year can often become the best performing investments a year or two later. However, looking at natural resources and international stocks, the two weakest investments areas in 2014, we think that they likely to continue to decline in early 2015, therefore it is too early to accumulate an investment position.

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

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The Best Fidelity Real Estate Funds for Portfolio Diversification

Recent reports suggested that both mortgage activity and new housing starts are slowing, which may steer cautious investors away from real estate companies that are involved in the residential space. However, real estate stocks can continue to be attractive investments, as long-term interest rates continue to decline:

We highlight here two excellent Fidelity funds that can be used for portfolio diversification. The first is the Fidelity Real Estate Investment Portfolio (FRESX), which invests in large cap real estate companies, such as the Simon Property Group, Public Storage and Ventas. Lower interest rates will help these companies by lowering the borrowing costs for capital-intensive projects and will also make their yield more attractive compared to bonds.

The three-year chart below shows that the net asset value of FRESX peaked out a year ago, which was followed by price consolidation in the second half of 2013. As interest rates started to decline in January, FRESX started a new uptrend and continues to outperform the broad market indexes.

The second fund is the Fidelity Real Estate Income Fund (FRIFX), which we have highlighted before, as one the top income investments for 2014 (see article). FRIFX invests in debt obligations and preferred stock of Real Estate Investment Trusts (REITs) and currently provides an attractive 4.54% yield. The chart pattern is very bullish with FRIFX resuming its uptrend in January that has not been interrupted ever since:

 

Buy and sell signals are available at FidelitySignal.com

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The Best Fidelity Funds Right Now May Surprise You

Volatility has increased in the equity markets in the last two weeks, which makes it confusing for investors to see where the market is headed. That is why it may be useful to take a look at the top 10 ranked Fidelity funds (ranking is provided by FidelitySignal):

To make sense of the current market dynamics, let’s focus on the Fidelity funds with green arrows in the weekly column. These are the investments that both make the top 10 ranking and also have increased their rank compared to a week ago.

On top of the list is the Fidelity Select Natural Gas Fund (FSNGX). The top panel in the chart below shows that FSNGX has a very strong relative strength (ratio of the the fund and the $SPY tracking index) compared to the S&P 500 index:

Our second example is the Fidelity Select Natural Resources Fund (FNARX). As noted in earlier blog articles, FNARX continues to outperform other equity sectors:

The third example is the Fidelity Real Estate Income Fund (FRIFX). We highlighted FRIFX as a top income investment choice for 2014 in previous articles and FRIFX continues to show a strong positive trend:

Now, let’s contrast our top  movers with the currently weakest sector, which is biotechnology (see FBIOX chart below):

 

In conclusion, while utilities and other defensive sectors are making gains, as well, the current market environment seems to favor natural resources and real estate investments.

 

Buy and sell signals are available at FidelitySignal.com

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Real Estate Continues to Outperform the Market in 2014

In previous articles we highlighted the real estate sector as one of the most exciting investment areas for 2014. A large increase of home sales sent homebuilding stocks higher yesterday. As the result, the Fidelity Select Construction and Housing Fund (FSHOX) gained 1.87% and was the best performing Fidelity fund of the day. The blue line on the chart shows that the relative strength of FSHOX (the ratio of the price of the fund versus the S&P 500 index) continues to improve:

We also made a bullish call for the Fidelity Real Estate Income Fund (FRIFX) on the first trading day of January (see article) and the chart shows that FRIFX has indeed performed well so far this year. FRIFX is an excellent income fund that provides a respectable 4.72% yield (source: Morningstar) and the potential for price appreciation:

The Fidelity Real Estate Fund (FRESX) holds large cap stocks in the space. The chart pattern shows a bullish breakout that started in January:

The improving U.S. economy can continue to lift the real estate sector higher this year, but investments in this sector can also be highly volatile. That is why diversification across of different types of real estate investments is key (see the real estate model portfolio at FidelitySignal):

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Best Income Funds for 2014: The Fidelity Real Estate Income Fund is Turning Bullish

The chart below shows the inverse relationship between interest rates (e.g. TNX – 10-year treasury note yield) and U.S. bond investments (e.g. FBIDX – Fidelity U.S. Bond Index Fund): rising interest rates have created a bear market for bonds starting in May 2013. Since interest rates are expected to continue to rise, this trend leaves few good choices for investors who are looking for income.

Source: FidelitySignal.com

One possible exception is high yielding corporate bonds. We highlighted the Fidelity Capital and Income Fund (FAGIX), as an excellent choice in the current market environment (see article from November 14, 2013). The chart below shows that FAGIX continues to perform well in 2014.

Buy and sell signals are available at FidelitySignal.com

Today, we’d like to highlight the Fidelity Real Estate Income Fund (FRIFX), as another choice for income investors in 2014. FRIFX is not a pure bond fund, but provides an impressive 4.82% yield. FRIFX invests in debt securities, and preferred or common stock of real estate companies. The current bond allocation is 42%, according Morningstar.

The chart below shows that the long-term bullish trend for FRIFX was interrupted during the May 2013 correction and the price (net asset value) reached a low point in August. The price pattern has turned positive again in the last four months and we would not be surprised to see FRIFX resuming its long-term bullish trend in 2014.

Buy and sell signals are available at FidelitySignal.com

 

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Real Estate Income Fund Turns Bearish

The Fidelity Real Estate Income Fund (FRIFX) is one of the best mutual funds available for investors who want to participate in the U.S. real estate market. Unfortunately, the continued rise of interest rates has weakened the sector (see previous blog post) and FRIFX is not longer an attractive investment, at least until the real estate sector turns around.

Source: FidelitySignal.com