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Portfolio > Portfolio Construction

4 Hot Trends to Buy Into Before Year Ends

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As we close out a year of record stock market gains, investors are looking to 2018, bracing for volatility while watching for signs that the current bull run has lost its resiliency. But before we bid our final adieu, we offer one last look at tradeable sectors for Q4 and beyond.

We see a range of trends occurring – including serious momentum surging through the semiconductor industry, housing sales enjoying an unexpected rise, global markets continuing to outpace those in the U.S. and geopolitics boosting the defense industry.

Whether you’re a bull or a bear, there are some clear opportunities to take advantage of short-term trends. We don’t side with either optimism or pessimism, but can help tactical thinkers understand the lay of the land on both sides of the trade.

1. Semiconductor Surge

Semiconductors are proving to be an interesting sector for traders looking to express short-term views, which can be seen as an affirmation that scientific innovation can’t be kept at bay. In Q4 alone, we’ve seen a 36% rise in the Direxion Daily Semiconductor Bull 3X Shares leveraged ETF (Ticker: SOXL), which targets the 300% daily return of the index.

In early November, Broadcom moved to purchase Qualcomm in a deal valued at $103 billion. Qualcomm rejected the unsolicited bid, but it remains to be seen whether a showdown will ensue. If completed, it would be a landmark deal and the largest technology takeover ever. Qualcomm has an 8.10% weighting and Broadcom a 7.43% in the benchmark index.

Strong earnings momentum in semiconductors – and tech as a whole – are propelling both sectors forward.

2. Unexpected Housing Spike

Sales of new U.S. single-family homes unexpectedly rose in September, hitting their highest level in nearly 10 years, offering hope that the housing market was regaining speed after appearing to stall in recent months. The market’s bullish reaction can be seen in NAIL, the Direxion Daily 3x Housing Bull ETF, up over 140% YTD.

In October, the rally continued with a 21% move in the 3X Homebuilders ETF. The news that Lennar is acquiring CalAtlantic group for $5.7 billion in the largest homebuilder’s takeover was an optimistic signal for the industry. The Home Builder Select Equity Index (SPSIHOTR) returned month to date 3.4% this year, and 22.65% through October. The Housing Market Index and Home Builder Sentiment Index are both at multi-year highs. Some of the big names in the housing space are Home Depot, Williams Sonoma and Lennar.

3. Eurozone Growth

Europe continues to experience its best GDP growth year of the past five years. The economy continues to expand further, with 17 consecutive quarters of positive growth. The Eurozone Manufacturing PMI is at all-time highs, and Germany, a major player, recently reported solid manufacturing numbers. European Central Bank (ECB) President Mario Draghi has made his intentions for slow removal of stimulus clear, helping contain investors’ fears over a premature end to quantitative easing.

It’s true that ECB easing has been beneficial to the European region. With inflation still well below the ECB mandate, the gradual pace towards tapering may continue to be a tailwind to the Eurozone. Top Euro financial names have seen great price appreciation YTD on solid fundamental and global growth trends. Balance sheets have largely restructured and improved, while consumer growth companies in Europe seem to continue to move.

The sentiment in the Eurozone has presented timely trade opportunities for investors looking to diversify from large cap U.S. equity markets; traders with conviction on the upward direction of the FTSE index can express a short-term bullish view on large and mid-cap European stocks.

4. Defense Builds

Since the election, investors have expressed optimism about the aerospace and defense sector. The expectation for major government spending has risen along with the increased risk of international tensions and uncertainty. The House passed a $700 billion defense policy bill in November—a compromise meted out by House and Senate negotiators reconciling two versions of the legislation—that would greatly benefit defense-related companies.

As the latest development in geopolitics, we’ve seen North Korea rhetoric increase in the past few months. The constant media attention will benefit defense names such as Boeing, for example, which has returned 44% YTD, potentially around news of increased production rates and aircrafts.

Another major player in the defense space, Lockheed, may also benefit from U.S. Navy unmanned undersea systems investments via government contracts, continued production and development of high-powered fiber lasers and investments in the Self-Protect High-Energy Laser Demonstrator (SHiELD) program. Boeing and Lockheed are top holdings within the DFEN Aerospace and Defense ETF, which is a great way to express a short-term conviction on that sector.


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