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:

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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.

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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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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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Rotation Continues into Large Cap U.S. Equities with the Exception of Energy Stocks

U.S. equities stabilized last Friday after the market sell off in the previous sessions. Increased volatility is not unusual in the fall season, as many of the infamous stock market crashes occurred in October.

The money rotation into large-cap blue chip stocks, which I highlighted in a recent article, has continued as investors are searching for the safety of large, stable companies in an uncertain market environment. As the result, Fidelity funds that invest in this space all show positive relative strength compared to the S&P 500 index. My top picks are the Blue Chip Growth Fund (FBGRX), the Magellan Fund (FMAGX) and the Contra Fund (FCNTX).

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Deflating oil and commodity prices in general has caused the stock price of large cap energy companies to decline, as shown on the chart of the Fidelity Energy Fund (FSENX) below. As commodity prices may eventually bottom in 2015, investments in the energy sector can become attractive again.

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View investment strategies at FidelitySignal.com

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The Fidelity China Region Fund and the Spartan Long Term Treasury Bond Fund Show the Best Relative Strength in the Aftermath of the Market Sell Off

Yesterday, the sharp stock market sell off spooked many investors. Several equity sectors were down more than 2% and the selling was broad-based. The cause of the sell off was a combination of mixed signals about the U.S. economy and the increase of geopolitical risks in Argentina, the Ukraine and the Middle East.

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While equities closed lower again today, the late afternoon rally increased the likelihood of the return of a more stable market next week. The Fidelity China Region Fund (FHKCX) held up the best during the sell off and may continue to do so should the equity sell of resume in September. The FHKCX chart shows that the strong bullish trend is still intact and the relative strength vs. the S&P 500 continued to increase during the sell off.

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Treasury bonds often serve as safe haven in volatile markets. It is widely expected that interest rates will rise in the near future, which should cause the price of long-term Treasury bonds to fall, not to rise. Consequently, a continued bull market for Treasuries may serve as a cautionary signal for equity investors (see Spartan Long Term Treasury Bond Fund chart below). Also, we are approaching the seasonally weak September-November period when most of the market crashes occurred. Taken together, the market action should caution investors to steer away from high risk investments until conditions stabilize.

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

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Top 10 Fidelity Mutual Funds

The Dow Jones Industrial average moved above the psychologically important 16,000 level today, the first time in the history of the stock market. This is clearly a sign that the great bull market of 2013 is still intact.

As we approach the seasonally strong December, it is worth taking a closer look at where the market leadership is coming from. The table below shows the top 10 Fidelity mutual funds ranked by momentum, courtesy of FidelitySignal.com.

Top 10 Fidelity Mutual Funds by momentum

Top 10 Fidelity Mutual Funds by momentum

 

The table shows that the Fidelity Select Leisure Fund (FDLSX) is moving up the fastest in the momentum ranking. In addition, FDLSX had the largest gain today out of all Fidelity mutual funds. The ranking also shows that today’s rally is broad based, which usually is highly bullish for the stock market.

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Source: FidelitySignal.com

Best Fidelity Mutual Fund of 2013: Select Biotechnology Fund is at All-Time High

Fidelity Select Biotechnology Fund (FBIOX, last change: 1.46%)

The Fidelity Select Biotechnology Fund (FBIOX, last change: 1.46%) has rewarded investors with a stellar 50.06% year-to-date return, which makes FBIOX the best-performing Fidelity fund this year. The bull market for the biotech sector started in November 2012 and has continued in 2013 with only one interruption in June. After the June correction FBIOX regained momentum and continues to make higher highs.

 

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