Fidelity Automotive And Technology Funds Leading The Pack

07/23/09 08:33:53 AM

by Donald W. Pendergast, Jr.

Now that the broad US markets have made a convincing upward reversal, traders need to focus on the strongest-performing groups and sectors.

Security: FSAVX, FNINX, FSDCX
Position: Buy

The stunning bullish reversal that occurred during the past week leaves little doubt that the broad US markets may just be getting warmed up in preparation for further gains. Those reading my Traders.com Advantage articles on a regular basis were already aware of the potential for a major reversal in the Standard & Poor's 500 by late July and, sure enough, the reversal arrived about a week earlier than anticipated, reversing on an 18-week price cycle rather than the 19- to 20-week price cycle that was originally forecasted.

As those involved with the financial markets for any length of time already know, pinpointing the exact timing of the turns in any market is a doubtful endeavor, and sometimes the best we can do is to simply be prepared to act on whatever opportunities the markets bring our way. Let's start with a brief overview of the weekly action in the S&P 500 and then drill down to examine the relative strength rankings of the Fidelity Select Sector funds, in hopes of determining where the lowest-risk opportunities may lie. See Figure 1.

FIGURE 1: $SPX, WEEKLY. Appearing to be a convincing reversal, the S&P 500 may be on its way toward the 1000 area soon.

Graphic provided by: MetaStock.

Graphic provided by: WB Detrend EOD from ProfitTrader for MetaStock.

Last week's wide-range reversal candle pretty much says it all; the S&P 500 has embarked upon a new upswing, one very likely to take it up to at least the next set of Fibonacci resistances near 1000-1012. That's only about 6% above the current index price of 940.38, and given the powerful double-digit gains that resulted in the wake of the last major weekly cycle low (March 6, 2009), such price targets don't look out of place at all. The reversal also allowed the index to finally clear the Keltner band midline, a support/resistance barrier that frequently identifies legitimate breakout and/or reversal points in most markets. In this case, it's been more than 19 months since the S&P 500 has been able to close above the Keltner midline on a weekly basis, lending extra credibility to the validity of the reversal.

Next up for the index is the job of plowing through its 50-week EMA (blue line on chart), and if it can perform that task in the next week or two, the potential for a swift runup toward the 1000 area shouldn't be ruled out.

FIGURE 2: FIDELITY SELECT SECTOR FUNDS, TOP FIVE. Of the top five Fidelity Select Sector funds, four of them hail from the technology sector. FSAVX is still leading the pack higher, however, as the automotive industry begins to recover after such major economic upheavals.

Graphic provided by: MetaStock.

Now that we've ascertained that the S&P 500 is likely to continue to run higher for at least the next few weeks, our next job is to determine which stock industry groups are outperforming this key broad market index itself. We do this by using a custom-designed MetaStock exploration, one designed to identify the performance of all 42 Fidelity Select Sector mutual funds over the last three-, six-, and 12-month time periods.

Right now, Fidelity Select Automotive (FSAVX) is leading the way higher, easily outperforming the rest of the top five funds in the list. This fund is up nearly 106% just in the last six months and has also maintained strong momentum during the past three months. Clearly, focusing on long entries in the automotive sector would seem to offer some of the lowest-risk opportunities in the stock market right now.

You'll also note that the other four funds in the list of the top five all hail from the technology sector, with stocks form the networking/infrastructure, communications, electronics, and technology groups all being represented. When an entire sector is on fire like this, expect to find plenty of long "buy pullbacks against the trend" kind of entry situations to appear. I'll leave it to you to do a little homework, allowing you to use your own technical timing method on the technology stocks of your choice, but for now, I'll simply alert you to the stocks with the strongest relative strength from the automotive industry group:

TEN Tenneco
LAD Lithia Motors
OSK Oshkosh Truck Corp.
TRW TRW Automotive Systems Group
FSYS Fuel Systems Solutions
SPAR Spartan Motors

Again, timing potential entry points on these stocks is up to you, but you might consider using something as simple as a stochRSI(10) indicator to help time a long entry, should any of these stocks pull back on a daily chart during the next few sessions. Trailing such an entry with a three-bar trailing stop of the lows could also be an easy way to limit losses and lock in potential gains.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title:	Writer, market consultant
Company:	Linear Trading Systems LLC
	Jacksonville, FL 32217
Phone # for sales:	904-239-9564
E-mail address:	lineartradingsys@gmail.com
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