Trend Check with Tushar Chande

Beneficiaries of Tax Reform


How to find beneficiaries of tax reform? Well, four stocks stood out today: Blackberry (BB), FedEx(FDX), Wells Fargo (WFC) and Verizon (VZ).  They broke out to new highs as the tax reform legislation completed its journey through Congress.  One way you can search for the beneficiaries of tax reform is to look at jumps in SCTR or the Chande Trend Meter (CTM).  Another is to look at industry group trend strength via the CTM. I will briefly illustrate both approaches below.

Chart 1: FedEx jumped higher as it is expected to benefit from the new tax regulations.


Daily Jump in SCTR

The daily SCTR summary is a good place to look for jumps in SCTR. In Chart 2 I show today's table for large cap stocks sorted by daily change (see column 7).  A short section of the daily table shows that energy and communications companies are high on the table (see industry trend strength below).  FedEx is roughly in the middle of the Chart 2, about the 20th row, a very good day indeed given the size of the universe. 

Chart 2: FedEx (FDX) SCTR value jumped by 10 percentage points today (see column 7), a nice day in the market.


Industry Group Trend Strength

Another way to look for groups helped or hurt by tax reform is to rank the major industry groups using the Chande Trend Meter (CTM).  In Chart 3 I show the major US industry groups ranked by CTM.  Interest-rate sensitive groups have tumbled (Utilities, Telecom and REITs).   Conversely, Paper, Oils, Airlines and Networking have strengthened.  We can connect the large number of Energy stocks in Chart 2 to the strength in $XOI in Chart 3. You can search for the constituents of each industry index to get the stocks that are acting well.

Chart 3: The US Paper index ($DJUSPP), Oil index ($XOI), Airlines ($XAL) and Networking index ($NWX) are the strongest industry groups.  Conversely, Utilities ($UTY) are the weakest group, followed by Telecommunications ($XTC) and REITs ($DJR).  Connect the large number of stocks in the Energy sector in Chart 2 to the strength in $XOI in this chart.

New Breakouts

Stocks breaking out to new highs is another area of research.  For example, look at FedEx in Chart 1, and the charts below.  BlackBerry gapped higher with a large gap and also made new highs, overcoming resistance at 11.75 and the two prior tests of this high. So, BB looks quite bullish.  Verizon also has a similar tale (see Chart 5), where it broke above two prior price spikes today.  The new high in Wells Fargo (WFC) is particularly noteworthy, given the bad press over various internal scandals that have dominated the news over the past year.  The action in WFC shows the power of tax reform on the bottom line of financial stocks.


Chart 4: BlackBerry broke out with a large gap from yesterday's high, so it is looking quite strong here.


Chart 5: Verizon is breaking to new 52 week highs even as the $XTC index remains weak.


Chart 6: Large banks are expected to benefit, and Wells Fargo, despite the recent spate of scandals, is making new 52-week highs.


Looking Ahead

Trend-following models remain well long, except for some selling in the small cap area.  The year-end rally is on deck, but much remains to be done in Washington and expect some backing and filling over the next few weeks as the markets adjust to the new tax rules.

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Tushar Chande
About the author: , PhD, MBA, is the inventor behind an impressive collection of technical indicators, including the Aroon and Stochastic RSI. He has written several books, holds both a PhD in Engineering and an MBA in Finance, and has over two decades of experience trading the financial markets. Follow Tushar in this blog as he highlights his new "Trend Meter" indicator and shares his analysis of current market conditions. Learn More
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