The past two weeks, the movement in the stock market has largely been due to news announcements — President Trump’s tweets and escalating trade war rhetoric. Even though it’s now May 2019, and the stock market has essentially traded directly higher since December 26th, it wasn’t too long ago it seemed as though the sky was falling.
Is this likely to happen again?
If so, where do we go from there? How do we trade a 3 month decline? Should we be worried?
Well, I’m not. After all, I see opportunity…
October 2018 started off a 3 month decline, filled with volatility, where indexes eventually entered bear market territory after rising interest rates, trade war escalations, and slowed earnings growth.
The market — or rather investors — remember the way the market reacted on trade war escalation news in October. How could we not? So, for me, Monday’s reaction demonstrated that lingering fear that we could get another Oct-Dec 2018 if the trade war rhetoric increased again. This, I believe, was the cause of the knee-jerk reaction that followed.
Now, one can also argue that President Trump’s tweets were really just the catalyst to bring the market back to the mean after hitting upside targets. I agree with that as well. But, we can’t ignore what’s going on on a macro level. We don’t have to understand every detail, but I wanted to break down the basics for you. Why? Because volatility means that as traders we need to be on top of our risk management. And, with volatility, also comes opportunity.
So, where am I seeing opportunity this week, and in the long-term?
First of all, I’m personally not ‘worried’ that the stock market will take another Oct-Dec 2018 flop. The Fed has exhibited caution with their rate hike schedule, and we experienced two unexpectedly strong earnings seasons so far in 2019. These two events have quelled a lot of fears. Yes, an escalating trade war is concerning but not if you know where to focus.
In my trading, I generally group stocks together in certain baskets. Baskets already created by others, such as the Sector SPDRs, and the FAANG stocks, that I’m now calling MAAFANG (Microsoft, Amazon, Apple, Facebook, Adobe and Google), or I create my own industry groups and lists. My specific lists of these industries are found within my Phoenix Folio. I group them as such, because not all industries are created equal, and there are certain times to look at one over another.
Here‘s my cheat sheet:
Escalating trade war news is bad for…
Companies that create physical products in China that are impacted by tariffs. Particularly companies within the industrial space, as steel is one of the main products that was hit with tariffs. This includes companies like Boeing, John Deere, and Caterpillar. This has me steering away from the ETF XLI, or the Industrial Sector SPDR ETF. It also includes Apple, since they produce iPhones in China, and they also have the additional issue of Huawei competition and IP theft.
It’s also particularly bad for the Chinese stock market. I generally like trading the KWEB, or the Chinese Internet ETF basket of stocks, but it got hit hard after trade war escalation at the beginning of last summer. I’m going to avoid names within this basket, such as Alibaba, Baidu, Tencent, and Boazun.
An escalating trade war likely won’t affect…
The majority of the MAAFANG stocks. Microsoft in particular, unlike Apple, has shifted from selling physical products to maintaining a wide array of revenue streams (mostly stemming from the cloud and products as subscription services). I don’t see Microsoft’s revenue streams being impacted by China whatsoever. The same goes for Adobe. Due to censorship in China, Netflix, Facebook, and Google are mostly blocked. Therefore, they don’t depend on the Chinese for a large portion of revenue or products like Apple does.
My favorite bullish take personally (regardless of a trade war) is based on the escalating need for cyber security firms, particularly with accusations IP theft, hacking, and spying from the Chinese. Whether true or not, this industry I believe will continue to flourish. This macro backing is upheld by the charts, as the technicals are completely aligned here.
Check out my Yahoo Finance appearance from Tuesday in which I discussed this in detail, along with some of my favorite cyber security picks. You can watch the clip here.
I’m going to continue focusing on areas of the market with relatively small China impact, but you must remember that when the market falls 600+ points, these will still be impacted. The difference, is that they’ll only experience the knee-jerk reaction, and beyond that… they rise like the Phoenix.
P.S. If you want access to my Phoenix Folio it’s included in my Phoenix Finder class. You can grab all those details here.