Sector Rotation: Technology and Transportation Stocks Reverse; Flight to Safety Lifts Utilities and Consumer Sectors; New Market Leaders Emerge

The congruence of multiple market forces is causing sudden shifts in the stock market:

  • A dramatic sell-off of large cap technology stocks triggered a flight to safety with potential benefits to defensive sectors, such as utilities and consumer staples.
  • The decline of the dollar versus all major currencies causes rallies in both cyclicals and commodity stocks. The energy sector shows signs of bottoming and bullish turn-around.
  • Higher energy prices are hurting airlines and transportation stocks, in general.
  • International markets continue to be attractive choices for diversification.
  • The strongest sectors continue to advance.

Sector screen is provided by Fidelity Sector Report

Today, large cap tech stocks experienced a classical bearish reversal day: the technology-focused Nasdaq 100 index first made a new record high, but by early afternoon sold off on high volume:

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On the other hand, defensive sectors, such as consumer staples and utilities, are attracting attention from investors:

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The dollar continued to decline against all major currencies:

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Since commodities are priced in dollar-terms worldwide, the weakening dollar has contributed to the recent rally in commodities stocks:

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Another beneficiary of the weak dollar is the cyclicals sector, also known as the consumer discretionary sector. Many of the companies in this sector are large multinational companies with overseas earnings that become more valuable when the dollar declines.

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Increasing energy prices are helping energy stocks, but hurting the transportation sector.

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International investments in Asia and Europe continue to do very well in the current market environment:

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The strongest domestic sectors right now are the media, defense, and materials sectors:

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Market Correction: Why Investors Should Avoid Consumer Stocks

It all started on June 9 with investors selling Apple shares after a downgrade, and continued with more investors dumping their holdings in tech companies, such as Google parent Alphabet and Tesla, resulting in an unexpected correction in the technology sector:
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At the same time, already weak sectors, such as energy, saw new waves of relentless selling:

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More recently, consumer-related sectors have experienced a reversal of the previously bullish trend, as shown on the chart of the Fidelity Select Consumer Staples Fund (FDFAX). Companies in the consumer staples sector are traditionally considered stable investments and investors often use them as safe havens. The recent trend reversal is a worrisome new development in our opinion.

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The consumer discretionary, also known as consumer cyclicals, sector is also following the same pattern:

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Additional consumer cyclical sub-sectors, such as automotive and retailing, are also breaking down:

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While sectors, such as financials, industrials, and health care, are still holding up in the recent selloff, the weakness in consumer stocks may be a cautionary sign ahead of the seasonally weak fall months.

Visit fund ratings at FidelitySectorReport.com for more information.

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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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View investment strategies at FidelitySignal.com

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Small Cap Stocks are Hit the Hardest as the Market Correction Unfolds; Avoid the Falling Knives; Large Cap Stocks and Biotechs Can Lead the Market when the Next Rally Arrives

Today was a tough day for stock investors. A toxic brew of bad news caused another round of market sell off, but now the volume is increasing, which is definitely not a good sign. The Russell 2000 index, representing small cap stocks, was hit the hardest out of the major U.S. stock indexes. Small cap stocks typically outperform during the expansionary phase of the economic cycle. Consequently, the underperformance of the small cap index versus the large cap S&P 500 index is a worrisome sign.

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In spite of the best efforts by the ECB, increased concern about economic contraction in Europe has caused Eurozone markets to enter a downtrend in July. As the Wall Street adage says, “do not try to catch a falling knife”, we believe that investors are best served to continue to avoid Eurozone investments until the proverbial knife hits the floor. Currently, no floor is in sight.

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Crude oil and other commodities tend to be priced in dollar terms, so as the dollar rallied against all major currencies starting in July, stocks in the energy sector to sell off. The sell off is also exacerbated by concerns about a possible world-wide economic weakness. We will continue to watch the relative strength of the energy sector compared to the S&P 500 index to look for a turn-around that may be similar to what we have seen in February.

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On the bright side, the bull market is still intact for large cap stocks as investors seek out the safety of blue chip companies. As we reported earlier (see article), a rotation of capital is under way into large cap stocks.

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Biotechnology is another area of the stock market that is still holding up. While investing in the biotech sector is appropriate only for aggressive investors, tracking this sector can give us clues about the ability of the stock market to rebound from the correction.

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View investment strategies at FidelitySignal.com

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The Dow Jones Industrial Average Index cannot Hold the 17,000 Level; Biotech Sector Shows Signs of a Possible Correction; Real Estate Stocks may be Ready for a New Rally

Ahead of the July 4th holiday, the Dow Jones Industrial Average briefly reached the all-time high 17,000 level, but was not able to hold it this week. The chart below shows that the Dow is still in a bullish uptrend, but what makes us concerned is the more severe sell-off in market leading sectors, such as biotechnology.

We are also approaching the seasonally weak fall period. Since many of the infamous stock market crashes occurred between September and November, we caution our readers to be increasingly careful with committing new funds to “risk on” investments.

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The biotech sector has been one of the market leaders in the last 18 months. The chart shows that the sector corrected hard from the March highs in April and May, but was able to rally back in June. The large 3.14% drop of the Fidelity Biotechnology Fund (FBIOX), which is the largest biotechnology fund available to investors, is concerning, because it may signal the start of a market correction.

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While aggressive equity sectors got hit hard today, long-term Treasury bond rates trended lower, which helped interest rate sensitive investments to go higher. One of our current favorites in this space is the Fidelity Real Estate Portfolio Fund (FRESX). FRESX was one of the few Fidelity funds that posted a gain today and we would not be surprised to see FRESX to hold its current bullish trend even if stock market conditions weaken.

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

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Market Correction: Treasury Bond Fund is Trending Higher; Biotechnology Sector is at Oversold Levels and May See a Bounce Next Week

We noted in in the March 26 blog article that the sector rotation has intensified as we approach the seasonally weak April-May period. In the last two weeks the stock market sell off continued, which negatively impacted most equity mutual funds.

Long-term interest rates have also started to decline, which benefits the Fidelity Spartan Long-Term Treasury Bond Fund (FLBIX). The chart below shows the inverse correlation of FLBIX and interest rates (see $TYX, the 30-year Treasury Bond Yield Index on the top panel).

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The biotechnology sector corrected the hardest in recent weeks. However, technical indicators show now that we have reached an oversold condition and a bounce is likely in the coming week:

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Source: 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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