Infrastructure Bipartisanship: Strong Steel Stocks

The midterm elections have been run and won, leaving the nation with a split Congress. Republicans remain in control of the Senate, while the Democrats regained the majority in the House. Although the Republicans and Democrats are at loggerheads over many policies relating to issues such as taxation and immigration, they may be able to bridge the gap on infrastructure spending, with leaders from both parties indicating a willingness to work together, increasing the likelihood of a bipartisan infrastructure reform bill passing.

"The Democrats are likely to push plans for large-scale infrastructure spending. Republicans have generally opposed Democratic plans on this issue, but President Trump has expressed support for infrastructure spending and might be willing to help," HSBC Holdings PLC (HSBC) chief U.S. economist Kevin Logan wrote in an October note to clients, per CNBC.

Earlier in the year, President Trump called on Congress to advance infrastructure spending to $1.5 trillion. Increased government infrastructure spending is likely to boost steel stocks as more bridges, roads, tunnels and ports get built. Investors should monitor key levels in these three stocks as the Republicans and Democrats attempt to roll out key reform in this critical area.

Founded in 1940, Nucor, with a $19.5 billion market capitalization, is the largest steelmaker in the United States by production output. Charlotte, North Carolina-based Nucor operates three segments: Steel Mills, Steel Products and Raw Materials. The company's involvement in each stage of the steelmaking value chain positions it to benefit from increased government infrastructure spending. As of Nov. 15, 2018, Nucor stock has returned 0.52% year to date (YTD) but is up 2.12% over the past month. Investors receive a 2.42% dividend yield.

Nucor's share price has traded in a choppy range throughout most of 2018. Over the past six months, an eight-point descending channel has formed, with the price oscillating evenly within the pattern. Traders should look for a breakout above the channel's upper trendline and 200-day simple moving average (SMA) on above-average volume to confirm an upward bias.

Headquartered in Los Angeles, Reliance Steel operates as a metal service center that provides steel, aluminum, stainless steel, specialty metals and associated services to customers across a variety of industries. In the company's third quarter earnings call, President and CEO Gregg Mollins said that he remains optimistic about the potential for increased infrastructure and equipment spending and added that it should help support earnings growth. Although the company's stock is down 3.94% YTD, it has still outperformed the steel industry average return by nearly 11% over the same period as of Nov. 15, 2018. Reliance Steel stock yields 2.47% and has a market cap of $5.7 billion.

Like Nucor, Reliance Steel shares have traded within a six-month descending channel. Throughout November, the 50-day SMA has acted as a resistance level, with the price failing to break above it on each test. Traders should look for bullish momentum to continue if the stock stages a breakout above the descending channel's upper trendline at $84.

Commercial Metals, founded in 1915, manufactures, recycles and markets steel and metal products. The company produces rebar and structural steel, making it a suitable fit for large government infrastructure projects, such as building and upgrading bridges, roads and utility systems. Trading at $19.18, with a market cap of $2.24 billion and offering a 2.5% dividend yield, Commercial Metals stock is down 7.79% on the year as of Nov. 15, 2018.

Commercial Metals' chart shows the company's share price trading within a broad descending channel. After testing the pattern's lower trendline in late October, the stock rallied 10% to start November before retracing back below the 50-day SMA. Traders should note the bullish divergence between price and the moving average convergence divergence (MACD) indicator – the October swing low made a lower low while the indicator made a higher low when compared with the April swing low. Divergence often provides an early sign of a possible trend reversal. A move above the descending channel's upper trendline and 200-day SMA at the $22.5 level would suggest further upside.