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Trade Deal Optimism Fuels Santa Rally: ETFs & Stocks to Bet On

Sweta Killa

Wall Street bulls are currently enjoying a festive rally, driven by positive developments on the trade front and easy money policies. In fact, the major indices are hitting a series of fresh highs in the final month of 2019. This is evident from the S&P 500 and the Dow Jones’ growth of 1.5% and 0.5%, respectively, so far this month.

Santa has Arrived!

In the preliminary trade deal, China committed to buy $40 billion of American agricultural products annually, tighten measures for protecting American intellectual property and stop forcing American companies to transfer their technology while doing business in China. In return, President Trump agreed to halt the planned tariffs on $156 billion of Chinese goods that were due to take effect from Dec 15. The Trump administration also cut tariffs, which were imposed in September, from 15% to 7.5% on Chinese goods worth $120 billion.

However, the 25% tariff on Chinese imports worth $250 billion, levied in March 2018, will be intact. The deal is expected to be signed in early January and has allayed fears of global slowdown and instilled confidence in the market. U.S. Trade Representative Robert Lighthizer stated that the deal will boost U.S. exports to China by $100 billion in 2021, nearly double the current levels (read: A Bunch of Top-Ranked Mega Cap ETFs to Bet on for 2020).

Additionally, a separate report showed that China will lower import tariffs on over 850 products, including frozen pork, pharmaceuticals and some high-tech components from Jan 1, and some information technology products from Jul 1. The optimism stemming from the trade deal has been a key catalyst and will continue to drive the stocks. This coupled with the Santa Claus rally have turned the market super bullish for the last five 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 because year-end seasonal factors such as holiday optimism, tax-related affairs, investment of Christmas bonuses, mutual fund manager window dressing, and the “January effect” drive the stock north. This makes December the best-performing month for the stocks (read: 5 Secret Santa ETFs & Stocks This Christmas).

Furthermore, the U.S. economy is in a strong shape with job additions at the fastest pace this year, unemployment dropping to the lowest level since 1969, and third-quarter GDP growth being revised upward from 1.9% to 2.1%. The housing market is also exhibiting signs of recovery with lower mortgage rates and slower home price growth. Internationally, the latest update from China shows that acceleration of industrial output and retail sales growth in November bolstered investors’ confidence. Meanwhile, Japan's economy expanded more rapidly than initially reported in the third quarter.

While most of the ETFs and stocks will receive 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. Meanwhile, 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

Invesco 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 hold more than 2% of total assets. About 43% of the portfolio is allotted to information technology while energy, consumer discretionary and industrials rounds off the next three with double-digit allocation each. It has amassed $181.7 million in its asset base and charges 0.25% in expense ratio. The ETF trades in average daily volume of 119,000 shares and has gained 5.1% so far this month (read: Market Rally Returns: High-Beta & Momentum ETFs to Buy).

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 26.3% while utilities, real estate, and healthcare round off the next three positions. It has accumulated $9.4 billion in its asset base and trades in solid volume of about 1.1 million shares a day. It charges 15 bps in fees per year and has gained 0.9% so far this month.

Invesco DWA Momentum ETF PDP

This fund tracks the Dorsey Wright Technical Leaders Index, which measures the performance of companies that demonstrate powerful relative strength characteristics. It holds 100 securities in its basket with none making up for more than 3.7% of assets. Information technology takes the top spot at 29.9% while industrials and consumer discretionary round off the next two spots. The product has amassed $1.8 billion in its asset base and charges 62 bps in annual fees. It trades in volume of 131,000 shares per day on average and is up 1.3% this month so far (read: ETF Strategies to Ride the Wall Street Bull Run).

SPDR Russell 1000 Momentum Focus ETF ONEO

With AUM of $430.8 million, this product targets the large cap securities with a combination of core factors (high value, high quality, and low size characteristics) and a focus factor comprising high momentum characteristics. It follows the Russell 1000 Momentum Focused Factor Index, holding 913 stocks in its basket with each accounting for less than 1.1% share. The ETF charges an annual fee of 20 bps and trades in average daily volume of 13,000. It has gained 1.6% so far this month. It carries a Zacks ETF Rank #2 (Buy).

Stocks to Buy

For stocks, we have chosen top picks using the Zacks Stock 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.

Office Depot Inc. ODP

This Florida-based company is a supplier of a range of office products and services. With a market cap of $1.34 billion and beta of 2.50, the stock has surged 11.7% so far this month. It has a Zacks Rank #2 and a Momentum Score of B. The stock belongs to a favorable Zacks industry (placed at the  top 9% of 250+ industries).

Boot Barn Holdings Inc. BOOT

This California-based company operates as a lifestyle retail chain devoted to western and work-related footwear, apparel and accessories. It has a market cap of $1.24 billion and a beta of 2.29. The stock has a Zacks Rank #1 and a Momentum Score of B. It falls in a Zacks industry in the top 21%. The shares of the company have appreciated 10.7% so far this month. You can see the complete list of today’s Zacks #1 Rank stocks here.

Nektar Therapeutics NKTR

This California-based biopharmaceutical company is focused on the development of treatments utilizing its PEGylation and advanced polymer conjugate technology platforms. It has a market cap of $3.75 billion and a beta of 2.61. The stock has gained 7.7% so far this month. The company has a Zacks Rank #2 and a Momentum Score of B. It belongs to a Zacks industry in the top 27% (read: Wall Street to See Best Year Since 2013: Will ETF Rally Last?).

Atara Biotherapeutics, Inc. ATRA

This California-based clinical-stage biopharmaceutical company is focused on developing therapeutics for serious unmet medical needs, with an initial focus on muscle wasting conditions and oncology. With a market cap of $823.1 million, the stock has a Zack Rank #1 and a Momentum Score of A. It is placed at top 25% of 250+ industries and has a beta of 2.04. ATRA is up 12.2% 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 rallies.

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