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U.S. stock market indexes rallied in January after a steep sell-off in late December:

Figure 1. The S&P 500 index partially recovered in January from the steep sell-off that started in October of 2018.

The major drivers for the weakness in equity markets, such as rising interest rates and a trade dispute between the U.S. and China, are still unresolved. Therefore, we think that volatility is likely to continue in Q1 2019.

In our view, the best investment opportunities right now are in emerging markets:

Figure 2. The chart of the Fidelity Emerging Markets Fund (FEMKX) shows a bullish “double bottom” price pattern.

We especially like the Southeast Asia region based on relative performance:

Figure 3. The Fidelity Southeast Asia Fund (FSEAX) shows improving relative performance, as measured by the ratio of FSEAX and the S&P 500 Index (bottom panel).

View fund rankings at FidelitySectorReport.com for more information.

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The S&P 500 index dropped 2.64% yesterday and lost more than 20% of its value compared to the recent peak:

In previous articles, we described that crash-like conditions were developing. In our view, we are witnessing a slow-motion stock market crash that possibly forecasts a global economic slowdown.

Yesterday, the panic selling impacted almost all asset classes, with the exception of gold and Treasury bonds, which are traditionally viewed as “flight to safety” trades.

In our view, the most oversold sectors will likely bounce in the coming days and may offer a short-term buying opportunity to aggressive traders.

To identify the most oversold sectors, we use the Relative Strength Index (RSI) indicator. When the value of the RSI is less than 30, we regard the investment as oversold (denoted with blue circles on the charts). When the RSI is less than 20, the investment becomes highly oversold.

Out of the 11 largest U.S. sectors, the energy, the industrials, the consumer staples, and the financials dropped the most yesterday, while also triggering the highly oversold condition:

The real estate sector is oversold, as well, and we think that this sector also has the potential for a short-term rally:

View fund rankings at FidelitySectorReport.com for more information.

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The broadly followed S&P 500 index continued its slide and it is now below the February low:

The Fed’s comments in combination with rising fears of a global economic slowdown negatively impacted the credit markets, as well. The chart shows that the ratio of the 5-year and 2-year U.S. Treasury notes is below 1 now. This condition is referred to as inversion of the yield curve, which may signal that the risk of a recession is higher than previously thought:

Almost all sectors show a negative performance for the last three months:

Gold miners and utilities are holding up the best:

We think that highly oversold sectors, such as banking and energy services, are ready for a bear market rally:

View fund rankings at FidelitySectorReport.com for more information.

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The S&P 500 index broke below its trading range Friday, which is the latest sign of the deterioration of the U.S. stock market:

Investor pessimism is driven by the slowing growth of the global economy, rising interest rates, trade wars, the Brexit negotiations and several other geopolitical factors. We think that we are at an inflection point and crash-like conditions can develop quickly.

A worrisome sign for us is the lack of sector leadership. Gold miners is the only sector that shows a positive return for the last three months:

While the Fidelity Select Gold Fund (FSAGX) has ourperformed recently, the chart does not show a bullish price pattern yet. FSAGX will have to break above the long-term trendline to start a new bullish trend:

On the other hand, the chart patterns of the weakest U.S. sectors, such as energy and industrials, are very negative:

In a previous article we described the turmoil in global markets. European and Emerging Markets continued to deteriorate since then and do not offer investment opportunities at this point in our view:

View fund rankings at FidelitySectorReport.com for more information.

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The large price drops of several Fidelity funds at the end of the Friday trading session were due to the distribution of capital gains, which happens periodically. The details are provided by Fidelity at https://www.fidelity.com/mutual-funds/information/year-end.

Here are a few examples:

View fund rankings at FidelitySectorReport.com for more information.

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Both the U.S. and the international markets reacted positively to the outcome of the mid-term elections with all major sectors rallying today. International markets rallied strongly, as well. Investor sentiment turned positive too, while consumer spending remains high. As we wrote previously, we’d like to see a strong December rally that can continue into the first quarter of 2019.

We’d like to highlight the Fidelity Real Estate (FRESX) and the Fidelity Telecom (FSTCX) funds today:

We continue to like the Fidelity Utilities (FSUTX) and the Fidelity Healthcare Providers (FSHCX) funds:

View fund rankings at FidelitySectorReport.com for more information.

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The VIX volatility index (often called the fear indicator) spiked in the last few days, reflecting a deteriorating investor sentiment:

Global markets started out on a good note in the morning, but reversed by the afternoon. One of the few bullish international markets, the Brazilian stock market, broke out of the trading range in the morning due to the election win of an anti-establishment presidential candidate. Unfortunately, the gains turned negative by mid-day and closed below the close of the previous day on high volume. This price pattern is called the bearish outside reversal, not a good sign for Latin American markets.

Argentina and Mexico, the other two large Latin American markets are already in bear market territory:

European markets are also declining steeply. Interestingly, following Angela Merkel’s statement about not seeking re-election as her party’s leader resulted in a small rally in German equities. In spite of that, the stock market of the strongest economy in Europe is clearly in a negative trend:

Another disappointment was the performance of the technology-heavy Nasdaq index. The chart of the Nasdaq 100 tracking ETF (QQQ) shows the same bearish outside reversal pattern:

The large-cap S&P 500 index is also deteriorating and seems to be heading to the February low:

Looking at the relative performance of sectors is unusually negative, with only a handful sectors producing small positive returns over the last three month period:

Perhaps the only sector that is in a reasonable uptrend is utilities, which in our interpretation shows a very defensive investor sentiment:

In our survey, the semiconductors sub-sector is the weakest, and we think that it still has room to fall:

On the other hand, materials, another lagging sector, is highly oversold based on the RSI indicator and could be ready for a short covering rally:

View fund rankings at FidelitySectorReport.com for more information.

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Rising interest rates and hawkish comments by the Fed caused a wave of deleveraging on a global scale. Investors pulled out rapidly from equities to reduce exposure, which caused the benchmark S&P 500 index to drop below its 100-day moving average:

The bear market in international equities, both Europe and emerging markets, accelerated to the downside:

Clearly, smart money is rotating into defensive sectors, while technology, cyclicals, and materials continue to underperform.

From the technical perspective, utilities look the best. The Fidelity Select Utilities Fund (FSUTX) made a new high yesterday, and we would not be surprised to see more investment money flowing into this defensive sector:

The relative strength for the telecom and the healthcare sectors is also positive:

The materials and the semiconductor sectors stand out as the weakest performers in 2018:

View fund rankings at FidelitySectorReport.com for more information.

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The Fidelity Defense and Aerospace Fund (FSDAX) and the Fidelity Select Telecommunications Fund (FSTCX) broke out from their trading ranges to new highs and turned bullish from the technical point of view:

View fund rankings at FidelitySectorReport.com

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The S&P 500 index continues to climb in September, in spite of worries about multiple potential trade wars:

As we highlighted in June (read article), the strong economy and increased consumer spending favor the consumer cyclical sector. That is why one of our favorite sector investments is the Fidelity Select Consumer Discretionary Fund (FSCPX):

View fund rankings at FidelitySectorReport.com

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