Three sectors stand out as potential short sale opportunities if a full-scale trade war breaks out in the coming weeks. Remarkably, these market groups have held close to their 2018 highs in the second quarter, with investors betting that political posturing will yield fruitful negotiations. That could change overnight if the Trump administration follows through on threats against China, Canada, Mexico and the European Union.
U.S. chipmakers stand to lose worldwide market share in a trade war because they're deeply embedded within Chinese technology products. The Asian nation has already begun an initiative to break free from foreign manufacturers, and an escalating crisis could accelerate the exodus. For Skyworks Solutions, Inc (SWKS), 83% of sales now come from China, with Qualcomm Incorporated (QCOM) at 64% and Qorvo, Inc. (QRVO), formed by the merger of TriQuint Semiconductor and RF Micro Devices, at 62%. (See also: 5 Chip Stocks at Risk in Expanding Trade War.)
Qorvo came public at $69.00 in January 2015 and eased into a shallow uptrend that topped out at $88.35 in June. It sold off into the first quarter of 2016, posting an all-time low at $33.30, while the subsequent bounce stalled in the mid-$60s in August. The stock cleared resistance in February 2017 and has spent the past 15 months stuck in a trading range between that level and the 2015 high. It could go either way here, with a trade agreement generating a powerful breakout into the triple digits while rising tensions could trigger a breakdown that brings the 2016 low into play.
Transportation stocks could also take a beating if a full-scale trade war breaks out. Shipping volume would fall at the northern and southern borders, as well as west coast shipping ports and worldwide packaging companies. Kansas City Southern (KSU) operates the largest north-south rail route and could implode if the U.S. pulls out of NAFTA, disrupting the mature supply chain in place for the past decade. (For more, see: A Trade War Could End Transport Bull Market.)
Kansas City Southern broke out above the 2008 high at $55.90 in 2011 and entered a powerful advance that topped out above $125 in 2013. A pullback into the $80s got bought in 2014, giving way to a failed breakout attempt that completed a double top breakdown in the fourth quarter of 2015. The decline settled in the low $60s, yielding 15 months of testing at the underside of the broken top. It mounted that resistance level in June 2017 but has failed to budge since that time, stuck in a holding pattern that will generate a strong sell signal with a decline through $100.
U.S. automakers have held up remarkably well, given their positioning at ground zero in the trade disputes. It's assumed that these companies will benefit if "buy American" becomes the law of the land, but General Motors Company (GM) and Tesla, Inc. (TSLA) have more to lose than gain after building Chinese goodwill and market share in recent years. GM also faces the threat of post-NAFTA supply disruptions and skyrocketing costs that force customers into the used car market. (See also: Ford, GM Shares Up as China Cuts Tariffs.)
General Motors nosed above the trading range posted after the 2010 IPO in 2014 and turned tail, descending in a volatile downtrend that found support in the mid-$20s during the August 2015 mini flash crash. It posted three higher lows into November 2016 and took off in an uptrend, hitting an all-time high at $46.76 in October 2017. A decline to the 200-week exponential moving average (EMA) got bought in March 2018, generating a sturdy bounce that has failed to reach the prior high. It needs to complete that task in a hurry or risk a lower high within a long-term topping pattern.
The Bottom Line
Semiconductor, transportation and auto stocks could get sold aggressively if political tensions turn into a full-blown trade war. (For additional reading, check out: Where to Invest for a Trade War: Goldman's View.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>