Is tariff talk setting up a breakout play?
03/06/18
It’s often said there’s nothing markets hate more than uncertainty—or surprises. The market’s behavior on March 1 would seem to be a good example, as what started out as an up day for the S&P 500 (SPX) faded into the red amid unexpected statements from the White House about implementing tariffs on steel and aluminum imports:
S&P 500 index (SPX), 1/24/18–3/5/18

Source: OptionsHouse

While the market has been abuzz about the potential ramifications of such a move, the following chart of US Steel (X) reveals a stock that had only a modest bullish response to Thursday’s news—and some stock watchers believe the relatively dull response could be attributed to the fact that it had already jumped so dramatically on February 16 when the Commerce Department “recommended” steel and aluminum tariffs on the grounds of “national security.”1

The stock has essentially moved sideways since that announcement, forming a trading range bound by roughly $42.50 on the downside and $47 on the upside—the upper boundary having been penetrated on an intraday basis by the March 1 intraday high.

US Steel (X), 1/2/18–3/5/18

Source: OptionsHouse

While the immediate bullish response by domestic steel and aluminum stocks to the news that their industry would be getting an economic assist from the government may be understandable, the congested trading of US Steel shares suggest this story’s ending is very much up in the air.

First, there is the issue of whether such tariffs will actually help the US steel industry and the US economy as a whole. As mentioned in “One step forward, two steps back,” the consensus among economists is that such measures typically turn out to be economically damaging because of the risk of retaliatory tariffs on US exports.

Many market observers likely saw the move as a step to address China’s perceived “dumping” of cheap steel on the US, but the US actually imports most of its steel (16.7%) from Canada, followed by Brazil, South Korea, and Mexico. China, which is responsible for only 2.9% of US steel imports, comes in at no. 10.2

Second, there’s the possibility that the White House actually has no intention of enacting trade tariffs (at least not as broadly or punitively as it has suggested), but is simply using tough talk as leverage in trade negotiations in general (i.e., “let’s make a deal,” or we might hit you with tariffs).3

Both of these points would seem to cast some doubt on the prospect of a sustained steel stock rally—a prospect that may also be evident in the recent “indecision” in US Steel’s price action.

Either way, a breakout of the stock’s current range—prompted by news that the tariffs will either be implemented or abandoned—has the potential to be a strong move, at least for a brief period. (As an aside, US Steel shares flipped from positive to negative yesterday as the “negotiating tactic” story appeared to gain some traction.)

LiveAction: Unusual Call Option Volume

Source: OptionsHouse

Options Trading Alert: Transportation manufacturer Navistar (NAV), which releases Q4 earnings on Thursday, traded around five times its normal call options volume yesterday (see OptionsHouse’s LiveAction “Unusual call volume” scan, above). The stock, which in recent days had fallen below its February correction low to its lowest level since September, rallied more than 4% yesterday.

 

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1 CNBC.com. Commerce Department calls for Trump to impose steep tariffs or quotas on foreign steel and aluminum. 2/16/18.

2 Reuters. Factbox: Top steel exporters to the United States. 3/2/18.

3 CNN.com. Trump uses tariffs as negotiating tactic in NAFTA talks. 3/5/18.