Tariff tantrums, trading ops?
08/03/18

If “tariff” doesn’t turn out to be The Word of the Year, it has to be in the running—at least in financial circles, where traders and investors have become accustomed to headlines along the lines of “Stocks retreat on latest tariff threats.”

Such threats aren’t the only news influencing the stock market, but on some days they certainly can be the lead story, and the market’s immediate reaction is almost never warm and fuzzy.

Yesterday was a typical example, as Asian equity markets sold off sharply after the White House threatened to increase proposed tariffs on $200 billion of Chinese imports from 10% to 25%.1 European stocks followed their lead, as did US stock index futures in Wednesday-Thursday overnight trading. Then the S&P 500 (SPX) fell to a seven-day low early in the regular trading session before chugging its way into positive territory for the day amid enthusiasm over Apple (APPL) capturing the $1 trillion flag (see “Trillion Dollar Baby,” below).

Which brings us to a pattern many traders have noticed in recent months—namely, the US stock market’s tendency to sell off on the latest tariff threats, then rebound, at least temporarily. Take a look at the following SPX daily chart, which marks the days on which the US initiated tariff threats (days of retaliatory threats are not included, nor are days when tariffs were actually implemented):

S&P 500 (SPX), 1/24/18 – 8/2/18. S&P 500 (SPX) daily price chart. Tariff blows and swing lows.

Source: OptionsHouse

It may not represent what a statistician would describe as an “exhaustive sample size,” but there’s no denying the similarities of most of these episodes:

●In all cases but one (June 22) the SPX closed higher the next day.

●In three cases (March 2, May 29, and July 11) the day turned out to be the beginning of a multi-day or multi-week swing low.

●In two other cases (March 23 and June 25) the day was part of a larger consolidation/bottoming formation wherein the SPX reached its low point within five days, then rallied for at least two weeks.

Also, it’s just anecdotal evidence, but yesterday’s short-lived bearish reaction and strong intraday rally in the US may suggest a measure of “tariff fatigue” on the part of investors and traders, in that threats have become so frequent they are losing some of their psychological impact.

That said, the most dangerous words in trading besides “This time is different” are probably “This time will be the same”—meaning, just because a market has established an apparent pattern, it by no means indicates it will do the same thing next time around. But for now, many traders will likely be watching these events to see if trading opportunities present themselves.

Trillion Dollar Baby: The milestone has been something of a moving target, but after Apple (AAPL) followed up on its 5.9% rally on Wednesday with a 3.4% intraday gain yesterday, the stock topped $208 and the company was acknowledged as the first (in the US) to reach a market cap of $1 trillion2 (if only briefly). In case you’re wondering, this is what that looks like: $1,000,000,000,000. That’s four commas and 12 zeros.

Apple (AAPL), 4/2/18 – 8/2/18. Apple (AAPL) daily price chart. Trillion-dollar day.

Source: OptionsHouse

Market Mover Update: Auto components stocks Borg-Warner (BWA) and Aptiv (APTV) bounced back yesterday after Wednesday’s down moves.

 

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1 Bloomberg.com. Trump's Tariff Threats Erase $220 Billion From Asia Stock Values. 8/2/18.

2 CNBC.com. Apple just hit a $1 trillion market cap. 8/2/18.