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Tax Reform Fuels Santa Rally: ETFs & Stocks to Bet On

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Thanks to Trump’s pro-growth economic policies aimed at accelerating economic improvement, reducing regulation, increasing spending, slashing taxes, and boosting jobs and corporate profits, the U.S. stock market is in the midst of the second largest bull run this year. 

In fact, the major indices hit a series of fresh highs early this week on optimism surrounding the biggest tax overhaul in decades with the S&P 500 and the Dow Jones gaining about 0.6% and 2%, respectively, so far this month.

Santa to Bring a Bag Full of Tax Benefits

The tax reform cuts corporate tax rates to 21% from 35%, lowers individual tax rates and allows companies to bring offshore cash back home at reduced rates. A massive $1.4-trillion tax cut will create an economic surge, boosting job growth and reflation trade. It will further accelerate earnings, leading to increased dividend and buyback activities and paving the way for increased mergers and acquisitions (read: 4 Sector ETFs & Stocks Set to Explode Higher on Tax Cuts).

After gaining approval from the Congress, the tax bill is now on its way to the White House for President Donald Trump’s signature, which is expected this week. It would be the key catalyst to stocks higher going forward. This coupled with the Santa Claus rally have turned the market super bullish for the last six trading days left this year.

A Santa Claus rally refers to the increase in stock prices in the final week of the calendar year (i.e. between Christmas and New Year’s Day) that extends into the first two days of the New Year. According to the Stock Trader’s Almanac, the Santa Claus rally has yielded average cumulative returns of 1.4% in 34 of the past 45 holiday seasons over the seven-day period since 1969.

This is especially true as year-end seasonal factors such as holiday optimism, tax-related affairs, investment of Christmas bonuses, mutual fund manager window dressing, and the “January effect” will push stocks higher. This makes December the best-performing month for the stocks.

Further, strong corporate earnings and accelerating economic growth continued to fuel growth. Earnings for the S&P 500 are expected to be up 11.7% in 2018, with the growth pace expected to double due to the tax legislation. Meanwhile, the economy expanded at the fastest clip in three years in best back-to-back quarters with at least 3% GDP growth and unemployment at the lowest level of 4.1% since December 2000. Americans are highly optimistic about the economy with consumer confidence climbing to the highest level in 17 years (read: Top-Ranked Growth ETFs at New Highs to Tap for 2018).

While most of the ETFs and stocks will see a nice boost, we have highlighted those that are expected to outperform in the seven-day period and are intriguing choices for a short spell. Notably, high beta and high momentum products are expected to lead the market in the weeks ahead. This is because high beta funds experience larger gains than the broader market counterparts in a bullish market. On the other hand, momentum investing looks to capture profits from buying hot stocks, which have shown an uptrend over a few weeks or a few months.

ETFs to Buy

PowerShares S&P 500 High Beta Portfolio SPHB

This ETF tracks the performance of 100 stocks from the S&P 500 Index with the highest beta over the past 12 months. It is widely spread out across each security as none of them holds more than 1.5% of total assets. About 37% of the portfolio is allotted to financials while information technology and industrials rounds off the next two with double-digit allocation. It has amassed $397.4 million in its asset base and charges 0.25% in expense ratio. The ETF trades in average daily volume of 181,000 shares and has gained 1.7% so far this month (read: 4 Smart Beta ETFs for Long Term Investors).

iShares Edge MSCI USA Momentum Factor ETF MTUM

This ETF follows the MSCI USA Momentum Index, holding 125 stocks, exhibiting a relatively higher price momentum. It is pretty well spread out across components with none holding more than 5.15% of assets. The ETF is skewed toward the information technology sector at 37.9% while financials, healthcare, and industrials round off the next three positions. It has accumulated $5.4 billion in its asset base while trades in solid volume of about 378,000 shares a day. It charges 15 bps in fees per year and has gained 0.6% so far this month (read: November ETF Asset Report: U.S. Tops, Treasuries Flop).

First Trust Dorsey Wright Focus 5 ETF FV

This product tracks the Dorsey Wright Focus Five Index, which provides targeted exposure to five First Trust sector and industry based ETFs that Dorsey, Wright & Associates (DWA) believes have the greatest potential to outperform the other funds in the universe. The approach results in a basket of 5 ETFs and charges a little higher fee of 89 bps per year. FV has AUM of $2.5 billion and average daily volume of 242,000 shares. It has added 1.5% so far this month.

PowerShares S&P 500 Momentum Portfolio SPMO

This product tracks the S&P 500 Momentum Index, which measures the performance of stocks in the S&P 500 Index that have a high "momentum score". It holds 100 securities in its basket with each accounting for less than 9% share. Information technology and financials take the largest share at 39.6% and 35.1%, respectively, closely followed by industrials (11.5%). The fund charges an annual fee of 25 bps and sees a paltry average daily volume of 3,000 shares. It is up 1.2% so far this month.

Stocks to Buy

For stocks, we have chosen top picks using the Zacks Screener that fits our five criteria: a Zacks Rank #1 (Strong Buy) or 2 (Buy), Momentum Score of B or better, beta greater than 2, and a Zacks Industry Rank within the top 30%. Here are the four chosen stocks.

Huntsman Corporation HUN

Based in The Woodlands, TX, Huntsman is among the world's largest global manufacturers of differentiated and commodity chemical products for a variety of industrial and consumer applications. With a market cap of $7.43 billion and beta of 2.84, the stock has surged 4% so far this month. It has a Zacks Rank #2 and a Momentum Score of A. The stock has Zacks Industry Rank in the top 26%.

Delek US Holdings Inc. (DK - Free Report)

Based in Brentwood, Tennessee, Delek US Holdings is a diversified energy business focused on petroleum refining, marketing and supply of refined products, and retail marketing of fuel and general merchandise. It has a market cap of $2.62 billion and a beta of 2.02. The stock has a Zacks Rank #1 and a Momentum Score of A. It falls in a Zacks Industry Rank in the top 19% and has added 0.2% so far this month. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Lincoln National Corporation LNC

Based in Radnor, Pennsylvania, the Cayman Islands, Lincoln National is engaged in the multiple insurance and retirement businesses in the United States. It has a market cap of $16.57 billion and a beta of 2.01. The stock has gained 1.1% so far this month and has a Zacks Rank #2 a Momentum Score of B. It falls in a Zacks Industry Rank in the top 21%.

Ribbon Communications Inc. RBBN

Based in Westford, Massachusetts, Sonus Networks is a leading provider of voice infrastructure products for the new public network. With a market cap of $815.7 million, the stock has a Zack Rank #1 and a Momentum Score of B. It belongs to a Zacks Industry Rank in the top 25% and a beta of 2.08. RBBN is up 3.3% this month.

Bottom Line

These products could be the winning picks for the next few days, as these would generate higher returns than other products when the market is booming.

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