Stock Market is at All Time High Again; New Investment Opportunities Emerge

The chart of the Fidelity Spartan U.S. Equity Index Fund (FUSEX) shows that U.S. equities broke out from a volatile trading range that started in early December of last year. At the same time, the yield of Treasury bonds reversed course, which caused the Spartan Long-Term Treasury Bond Fund (FLBIX) to correct:

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Mutual funds investing in the leading sectors have continued to advance this year, but may be ripe for a pullback now to their respective moving averages (blue lines on the charts):

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As the equity market has turned more bullish again, sector rotation has intensified, as well. This is good news for investors, since new investment opportunities are emerging. One example is the Fidelity Select Materials Fund (FSDPX):

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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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Stock Market Correction Causes Flight to Safe Investments

As the equity market correction unfolds, the current list of the top 10 Fidelity mutual funds shows a dramatic shift compared to what we have seen throughout the year: seven out of the top ten funds are now income funds.

 

Top 10

One of the most important new developments is that the yield of the 30-year Treasury bond continues in a downtrend causing long-term Treasury bonds to to resume a very strong uptrend:

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The weakest investments that I highlighted in previous blog articles, such as mutual funds investing in the Eurozone and energy, have continued to decline. However, they are so oversold now that it would not be surprising to see a relief rally.

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The market leaders of the last 12 months, including technology and communications sectors, are turning over now, which is a worrisome sign about the short-term prospects of the stock market:

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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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Bear Market for Treasury Bonds Continue

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The yield on the benchmark 10 year treasury note have moved above 2.70%. With interest rates continuing to go up, it is not surprising to see investment funds for treasury bonds to continue the decline that was started in May 2013.

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