Tariff trading
04/04/18

The opening trade-war volley has been returned.

Any illusions that tariff talk was just a political sideshow without meaningful economic implications have been erased by the reaction of several markets on Monday to China’s announcement of duties on various US food exports.

Tyson Foods (TSN) 11/8/17–4/3/18. Daily TSN price chart. Pork tariff news.

Source: OptionsHouse


One of Monday’s notable victims was meat producer Tyson Foods (TSN), which took a 6.2% drubbing on news that China was slapping a 25% penalty on US pork in retaliation for US tariffs on steel and aluminum. Hog futures took a hit, too: The April contract (HEJ8) dropped 5% on both Monday and Tuesday. Tyson bounced back a bit yesterday, rallying more than 2% intraday (to above $70).

Although some pundits have argued that China’s tariffs (which encompass more than 120 other products, including wine, fruit, and nuts) are more symbolic than punitive, since they don’t hit US mega-exports such as soybeans and corn, try telling that to Tyson and other American pork suppliers. The US is the world’s largest pork exporter, and China is its third-largest customer in dollar terms ($1.1 billion last year).1

Monday’s news triggered the stock’s downside breakout of a six-week trading range and took TSN to its lowest level since September—smack-dab in the middle of a support zone containing the February, April, August, and September 2017 highs, as well as the September up gap (see chart below). Monday’s low also approached—but didn’t quite reach—the 61.8% Fibonacci retracement of the June-December 2017 uptrend around $67.73, which is also the August 2017 high. (Fibonacci levels are trend-retracement percentages watched by many traders; the three most popular levels are 38.2%, 50%, and 61.8%.)

Tyson Foods (TSN) 12/21/18–4/3/18. TSN daily price chart. Support zone

Source: OptionsHouse


While Monday’s sell-off could be a one-and-done event, if the market’s recent volatile reactions to other tariff developments are any indication, lingering uncertainty over trade wars could potentially weigh on TSN shares in the short-term, despite yesterday’s bounce. Further out, though (perhaps after a penetration of the 61.8% retracement level that takes prices deeper into the August-September consolidation?) there are reasons bulls may consider long-side plays in TSN.

First, the company isn’t overwhelmingly dependent on pork (hello—Tyson chicken), and it’s been enjoying steady growth in poultry, beef, and prepared foods amid rising demand for protein-heavy products.2

Also, Tyson’s strong Q4 earnings release on February 8 may have gotten lost in the broad-market correction taking place at the time. The company topped estimated earnings by 20% on strong revenues, prompting at least one firm to up its price target.3 And despite one widely reported analyst price-target drop prompted by the Monday tariff announcement, the average target for TSN shares on E*TRADE (logon required) remains $81.29.

Market Mover Updates: The S&P 500 index (SPX) traded very near to its February correction low on Monday while the CBOE Volatility Index (VIX) only rose to around half its correction high (see chart below). “VIX watch” described the pattern of a lower SPX low (i.e., we’re not quite there yet) accompanied by a lower VIX high—a disconnect that has occurred at many (at least temporary) past SPX bottoms. Normally, a lower SPX would be associated with a higher VIX.

S&P 500 (SPX, top) and CBOE Volatility Index (VIX, bottom) 8/24/17 – 4/3/18. Another drop, less “fear”

Source: OptionsHouse


Finally, it didn’t take long for Taser-manufacturer Axon Enterprise (AAXN) to break out of its trading range: AAXN jumped more than 6% yesterday, pushing to a record high above $42.

 

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1 Forbes. China Retaliates On The American Heartland. 4/2/18.

2 Zacks.com. Is Tyson Foods (TSN) Well Braced for High Pork Tariffs? 4/3/18.

3 StreetInsider. Tyson Foods (TSN): Top Pick for 2018 - Mizuho. 2/9/18.