Month: April 2014

Midway through the week, the focus is still on the Dow Jones Industrial Average. Its historical closing high is 16,576 and it comes into Wednesday trading a stone’s throw away from that record once again.

iShares Nasdaq Biotechnology (IBB)

Biotechnology shares had a scare on Monday as bears raided the weakest sectors once again. The candlestick chart below shows IBB broke through its 200-day moving average intraday before bouncing and moving higher on Tuesday.

IBB didn’t break its prior low and instead formed a higher support level. While there are early indications that trading in this sector may be volatile today, IBB’s rebound on Tuesday is a positive indication, and evidence that the sector is turning a corner.

Global X Social Media (SOCL)

Social media and Internet stocks did not fare as well over the past week. As the chart below shows, social media shares reached a new low on Monday, as did Internet ETFs. This is not a good sign for the sector; it is likely to lag if the market rallies and it could see big losses if the stock market sells off again.

Many firms in the social media and Internet space have extremely high P/E ratios. In weak markets, stocks that rely on optimism are hurt the most when investors become fearful. Twitter, in particular, released its second earnings results last night and has social media investors concerned. Some commentators, however, believe that Twitter may still achieve the type of universal adoption characterized by Facebook. That said, with the broader market appearing to move higher, these stocks could rebound strongly.

LinkedIn (LNKD) will also report earnings this week.

SPDR Consumer Discretionary (XLY)

At the start of the year, we were looking for the consumer discretionary sector to mean revert after 5 years of outperformance. Thus far, that prediction has held true. Consumer discretionary is the only S&P 500 sector that is down for the year. Highlighting the weakness in the sector is Amazon (AMZN), which tumbled on Monday.

Although the sector hasn’t seen huge losses, it has a chart that resembles biotechnology. Like IBB, XLY bounced off its 200-day moving average on Monday. When the weakest sector in the S&P 500 shows bullish signs, which is usually good news for the overall market.

iShares Barclays 20+ Year Treasury (TLT)

Investors will have on eye on Treasuries today with the Federal Reserve announcement at 2 PM. If TLT rallies 2 percent it will make a new high for 2014, and stocks will likely sell-off. If, on the other hand, we get a bullish move in stocks this week, TLT could sink as much as 2 percent before it hits its 50-day moving average, which has served as TLT’s support level.

Also worth watching is the 10-year yield as it has been in a tight range between 2.60 percent and 2.80 percent since February. Odds are that yields will move higher, but this sideways consolidation phase could break either way. A move lower could take yields down to 2.50 percent before rebounding, while a move above 2.80 percent would open up a challenge of the 3 percent high set last year. A move of that magnitude to the upside would likely accompany a strong rally in stocks that might finally put recent volatility into the rear view mirror.

iShares U.S. Real Estate (IYR)

Real estate has been another sector hurt by rising interest rates in 2013. While rates remain elevated in 2014, when compared to last year, they are near the level we saw in July 2013. IYR bottomed in August 2013, just ahead of interest rates peaking in September. Real estate stocks have turned in some of the better performances this year, but this sector should be handled with care when interest rates break out from their current range.

On the surface, the performance of the major indexes appeared to show a calm market over the first few days of the week. If we look deeper there is a raging battle between the bulls and bears.  That was very evident today at the major indexes slumped, led by the Nasdaq which was down 1.75 percent.

The Dow Jones Industrial Index came within 16 points of its all-time high during trading on Tuesday, and closed Thursday about 0.5 percent away from that new high.  A new high was not yet meant to be; the DJIA dropped .85 percent on the day.  Earnings results from Ford (F) and Amazon (AMZN) sent the market sliding today.  Bulls are still waiting and watching for a break, but selling throughout the day means no new highs will come for several days.

Nevertheless, the DJIA is still close to a new high. A solid day or two in the market could push it into record territory and force the bears to cover shorts.  This has the potential to start another multi-week rally in share prices after a long sideways consolidation period this year.

The next few days will give us a strong indication of the direction the economy and stock market will be headed over the coming months. The bears believe the markets are topping and chartists see the Nasdaq and Russell 2000 as tracing out head-and-shoulders patterns. This would indeed be a bearish topping pattern if fully formed. Luckily for the bulls, these patterns are not complete and are only speculative guesses.

More worrisome is the economic weakness in China. The yuan weakened below the critical 6.25 level and reports show no sign of a pickup in economic growth. Also of concern is the escalating situation in Ukraine. There is a financial war unfolding and Russia is responding to U.S. financial attacks by threatening retaliation. China and other emerging economies could deliver a major blow to Western markets if they act in concert, and they have grown increasingly wary of U.S. political interference in economic affairs.

If the conflict escalates in this direction, it could prove to be the financially destabilizing shove that finally pushes China into a further slowdown. Investors should not assume that leaders in Moscow and Beijing, who are politically secure, would be unwilling to make economically damaging moves that have big political payoffs.

While a few high profile risks exist, there are still a number of positive indicators. The most important stock for technology funds is Apple (AAPL), which delivered a positive earnings report, raised its dividend, increased its buyback plan and announced a 7 for 1 stock split.

Additionally, the flash manufacturing PMI for April indicates the U.S. manufacturing sector is still expanding at a healthy clip. Manufacturing is a leading sector in the economy and continued strength here will mean solid growth for months to come. Confirming the PMI number were strong results in durable goods orders.  Next week the GDP report for Q1 and the unemployment rate for April will be released.  This will give us even more insight as to the direction of the economy.

Global X Social Media (SOCL)

Social media stocks have come under significant pressure over the past few weeks. If momentum stocks haven’t finished selling off, SOCL should be one of the first to crumble. For investors wanting to play a bounce in momentum stocks, this is not the fund to use.

With that in mind, Facebook (FB) delivered very strong earnings after hours, with advertising revenue up. The firm generated $885 million in earnings for the quarter, helping shares gain 5 percent headed into Thursday. We’ll have to see if those gains hold throughout the day, and whether it’s enough to pull SOCL closer to its 200-day moving average. Facebook is one of the two largest holdings in the fund, as it accounts for 13 percent of assets. Were the entire sector to bounce as much as Facebook did overnight, SOCL would be near its 200-day MA. Investors may want to wait until that line is clearly breached before buying; down days continue to see larger volume than up days.

LinkedIn (LNKD) and Twitter (TWTR) report next week.

SPDR Retail (XRT)

Retail is at a crucial juncture, having climbed above its 200-day moving average and then falling back on Wednesday. A bullish move could be underway according to the technical signs.

Even if the sector were to decline further, it is not necessarily bearish for the economy as consumption is a lagging indicator. If manufacturing and other industries are picking up, this is ultimately good news for the economy.  However, it may take some time for wages to pick up given the still large number of people who are not in the labor force.  This may curtail a significant jump in retail spending.

iShares U.S. Oil & Gas Exploration & Production (IEO)

Energy is one of the leading sectors right now and higher energy prices are generally bad for consumers and the retail sector. While oil prices slipped in the past week, natural gas looks like it wants to challenge its high for the year.

IEO and Energy Select SPDR (XLE) climbed last week, but fell back when oil prices slipped on Tuesday. IEO is overbought and there’s a gap in the chart at $88. XLE has a similar gap at $91. While that is only a small dip of 2 percent, a pullback seems likely here. For investors who want to buy into energy, wait until the gap is closed before opening a position.

iShares Barclays 20+ Year Treasury (TLT)

Treasury yields have been pushing higher this week. Higher yields (lower bond prices) are bullish for stocks. A rally in stocks this week could begin the process of taking TLT down for another test of its 50-day moving average.  TLT has been in a downtrend since peaking in the summer of 2012, when interest rates bottomed. The trendline for this decline is currently below $115.  A further drop in TLT would be another bullish indicator for equities.

iShares Nasdaq Biotechnology (IBB)

Biotechnology has enjoyed a rally of late but it is nearing an important technical point. There is a head-and-shoulders pattern in play that, were it to continue, implies IBB could sink below $200 per share, another 20 percent loss from current levels.  If IBB climbs above $245, a gain of roughly 5 percent, it would indicate a bullish rebound may continue.

Fidelity has won 18 Lipper Awards recently across 15 funds. The awards were given on the basis of “risk-adjusted, consistent return.” There was no sector or asset class concentration in the awards, with everything from treasury bonds to biotechnology and China winning recognition.  In several cases, the institutional (lower fee) version of a fund won the award.

Below are the winners:

Fidelity Advisor Biotechnology (Institutional)
Fidelity Advisor Income Replacement 2042 (Institutional)
Fidelity Advisor International Real Estate (Institutional)
Fidelity Pacific Basin
Fidelity Select Consumer Finance
Fidelity Select Defense and Aerospace
Fidelity Spartan Long-Term Treasury Bond Index
Fidelity Advisor China Region (Institutional)
Fidelity Advisor High Income Advantage (Institutional)
Fidelity Convertible Securities
Fidelity Select IT Services
Fidelity Intermediate Government Income
Fidelity Select Energy
Fidelity Select Software and Computer Services
Fidelity Worldwide

We hold several of these funds in our portfolios, including Fidelity Convertible Securities (FCVSX) and Fidelity Select Energy (FSENX).  In addition, numerous other funds, such as Fidelity Select Biotechnology (FBIOX), which have been highly ranked the newsletter.  In general all of these funds are solid choices in their part of the market. This month we’ll look at how some of these asset classes and sectors are shaping up in 2014.

The biotechnology sector has been outperforming for more than two years now, with the fund’s performance accelerating in early 2014 (a chart of FBIOX starts looking hyperbolic in late 2013). Going back to the start of its outperformance in 2011, when FBIOX was up about 17 percent in a year when the S&P 500 Index was flat, the fund climbed as much as 236 percent from its closing price in 2010. Since hitting its peak, however, shares have tumbled, down 17 percent over the past two months.

There are reasonable explanations for biotech’s slide. One is company specific issues. As mentioned in the Market Perspective, Gilead (GILD) received a letter from Congress asking about the $84,000 price for its hepatitis-C drug, Sovaldi.  However, while the Congressional inquiry may have shaken up the company, the losses in GILD are right in line with the sector. Many analysts see GILD rebounding from the sell-off.  The drug, while expensive, is also highly effective and cheaper than the alternative of treating patients with this chronic illness.

The other reason for the drop in stock prices is overbought conditions. Biotechnology exploded higher in 2014. FBIOX was up more than 25 percent by early March, compared to the S&P 500 Index which was only breaking into positive territory in March. Investors piled into volatile, high growth sectors such as biotechnology and Internet stocks early in 2014 and this resulted in a sell-off over the past few weeks. Given the run-up, further profit taking may be a possibility given the huge advance in biotechnology shares. Over the long-term, the outlook for biotechnology remains positive due to an aging population and a need to find more cost effective treatments.

Fidelity Convertible Securities (FCVSX) remains a solid choice for investors looking for a little more risk than bonds, but less risk than stocks. Convertible bonds can be converted into equity once the stock price reaches a certain threshold. Those bonds a long way from converting to equity will behave in a more traditional manner. As the stock price climbs, the bonds begin behaving more like equities. These funds offer some downside protection when stocks fall (since they trade more like bonds) and they offer upside during bull markets.

Convertible bonds yield about 2 to 3 percent, and FCVSX paid a yield in the middle of those two figures last year. Fidelity Convertible Securities gained 24 percent last year, lagging the 31.9 percent advance in the S&P 500 Index. The future significantly outperformed straight bond funds, many of which lost ground due to rising interest rates.

FCVSX had outperformed the S&P 500 Index for most of this year, although it how now lost some ground, trading even with the broader index. The fund has about 18 percent of assets in equities and two of those equities are top ten holdings: General Motors (GM) and Citigroup (C). GM has recall problems this year, and Citi failed its stress test last week, sending shares sharply lower. It’s a bit of bad luck for FCVSX, but the fund won its Lipper Award for 5-year performance and investors should keep an eye on the long-term performance. Unlike other more volatile sectors, the benefits from owning FCVSX accrue more slowly across a complete market cycle.

Fidelity Pacific Basin (FPBFX) won three awards for three-, five- and ten-year performance. Manager John Dance was appointed in October of 2013, so he has some big shoes to fill. The fund has hit a new post-2008 high, which is better than the benchmark Pacific/Asia indexes. Strong performance came on the back of technology shares, helping FPBFX to track the Nasdaq as it moved higher in 2013. The top holding in FPBFX is technology giant Softbank, plus both Taiwan Semiconductor and Tencent Holdings are counted among the top ten. Softbank and Tencent both rallied more than 80 percent last year.

FPBFX also benefited from Abenomics last year. The rapid devaluation of the yen unleashed a stock market rally, but with about 37 percent of assets in Japan, FPBFX will need to see this trend continue, something which is an open question in early 2014. Australia is the next largest country exposure in the fund at 13 percent of assets, followed by Hong Kong at 12 percent, China at 9 percent and Korea at 8 percent. These four economies are all closely linked to the Chinese economy and the slowdown in China is worrisome.

Another Lipper Award winner was the institutional class of the China Region (FHKCX) fund. Chinese shares are nearly flat for the past 5 years, having peaked in summer 2010, but FHKCX kept posting gains. It still hasn’t surpassed its 2008 peak, but the performance is very good considering the overall condition of the Chinese stock market. This makes FHKCX an attractive pick for investors looking to buy China. It also shows that Fidelity has strong analysts who have helped keep two emerging market heavy funds outperforming their peers, and that gives us more confidence in the recent appoint of John Dance as manager of the Pacific Basin fund.

Conclusion

At a time when ETFs are providing a formidable challenge to mutual funds, Fidelity’s strong management shows that active managers still have much to offer investors. Those who favored a market capitalization weighted China index ETF, for example, would have seen their money go nowhere over 4 years, while Fidelity’s China Region fund racked up respectable gains. Active managers have some restrictions on how they invest, but they also have more freedom to shift a portfolio towards sectors and countries experiencing bull markets.

Furthermore, awards were won across a spectrum of funds at Fidelity, including convertibles, international REITs, bonds and sector funds. This shows the strength of Fidelity’s managers and the analysts who help them find individual assets that can outperform the market. While the list of winners above is strong, it is not an exclusive list of the many great funds offered by Fidelity.