I joined Bart Chilton on RT America’s show, ‘Boom Bust’ earlier today to discuss the potential results from America’s talks with China, along with what it means for the market.
Check it out…
First off are there any winners in the Trade War?
Throughout this trade war, I think it’s safe to say that no one has been a ‘winner.’ Of course, this is subjective. But, I’d say that the stock market has demonstrated its dislike for the political instability between the two countries.
The Chinese market took quite a tumble throughout 2018.
This gave me ample opportunity to short Chinese internet stocks in particular, such as Baidu and Alibaba. Each retracement has merely been a reversion to the mean, that quickly lost favor with the bulls. I’m sure the Chinese aren’t huge fans of this stock market action.
What about the US equity market?
A market that was incredibly resilient in 2017, despite ongoing rhetoric with North Korea, finally lost its ability to sustain strength through political news when word of a trade war first surfaced. The hardest hit stocks and sectors included anything with large exposure to China. Makes complete sense, and I saw this one coming.
At times it was hard to discern the ‘China tariff effect,’ as many U.S. companies are based in the U.S. but manufacture in China. One also can’t ignore that China’s the country with the largest population on the planet. Chinese consumers, and what they’re inclined to purchase, can also greatly impact a company’s bottom line.
Now onto what I’m coining as ‘The Rotten Apple China Effect.’
A couple weeks ago the CFO of the Chinese company, Huawei, was arrested in Canada at the hands of America. This led to China to push their consumers away from American products more aggressively. Products such as Apple, and onto their own competing products sold by companies such as Huawei.
Did this have an impact on the US bottom line? Of course!
This has had a measurable effect on AAPL. You can see this directly proven as Apple CEO Tim Cook was forced to pre-announce AAPL’s earnings shortfall a month before their earnings date. Not coincidentally he noted a $5 billion shortfall due to performance in China.
AAPL, mind you, derives majority of its profits from iPhone sales, due to a lack of diversification of product lines… and a huge percentage of that comes directly from China. Between tariffs, Huawei competition, and legal action against them preventing them from selling older models in China, they’re taking a measurable hit to their bottom line.
Now, keep in mind, this isn’t the case for all of tech. Companies like Microsoft that have larger diversification in product offerings as well as less China exposure, won’t be hit like Apple has been.
I explain this even further with additional commentary on China’s effect on Apple HERE.
But I’ll spare you my long winded deep dive and give you what you really want…
When China and America finally come around, what can we trade?
Both semiconductors and industrials are two areas that we can look to for potential money flow.
Why semiconductors?
These stocks, including the likes of Intel (INTC), Advanced Micro Devices (AMD), and Nvidia (NVDA) have taken a huge beating due to their China exposure, one that doesn’t represent their fundamental values. The semiconductor industry is one that’s continued to expand ever since its inception. In our high tech society it isn’t going to slow down anytime soon.
The constant competition especially between INTC and AMD, along with low valuations, makes them great long-term buys, as well as potential short-term options plays.
Check out this video for my swing options take on INTC for a run into earnings (p.s. it’s free).
Why industrials?
Well, like the semis, companies like Boeing (BA), Caterpillar (CAT), and John Deere (DE) took large hits due to their China exposure and under the assumptions that their bottom lines would be affected accordingly. However, I spy some oversold reversal signals on their weekly charts, particularly with DE, as it also has a weekly squeeze.
The industrials, prior to 2018, were some of my favorite stocks to trade as they had beautiful trends and were excellent run into earnings candidates. After the trade war rhetoric blows over, particularly if they can survive this upcoming earnings season and prove (unlike Apple) that their bottom lines are strong, I think they’ll be back in the favor of investors.
Now, these are countertrend, long-term stock buy setups… and for those of you who know me, know that I typically stick with a much shorter time horizon in the options market. However, one of the most important facets of the Five Star system is recognizing when key sectors or industries are set to change course due to overall sentiment, money flow, and technicals.
While they aren’t completely confirmed yet, I want traders to be on the lookout for positive trade war news, plus action in these areas of the market. Positive news from President Trump, plus a better than expected earnings season, would be just the catalyst we need to send these sectors back into favor — and give us a solid buying opportunity.
Moral of the story here…
There isn’t much to be gained, in my humble opinion, from animosity between two of the world’s greatest powers. I think, *I think* both presidents have come to this conclusion as well, after seeing both of their markets tumble, but, the verdict is still out. So, what will they do when they meet to discuss their truce?
We can’t say for sure, but I think they have significant reason to want to make a deal that works for both countries.
