President Donald Trump has renewed his threat to kill NAFTA after criticizing Canadian and Mexican positions in ongoing negotiations. Many Wall Street analysts believe that the United States has more to lose than its northern or southern neighbors if the president follows through, as ending the trade agreement could trigger steep declines in a broad swath of publicly traded issues that depend on north-south trade for their quarterly and annual revenues.
Three potential short sale plays stand out if NAFTA collapses, but given mixed messages from the White House, no one knows when sell signals will go off. Even so, now is the right time to identify profitable strategies – not after a Tweet or executive order sends shockwaves through the U.S. financial markets. Railroads, auto manufacturers and truckers look like the biggest losers should NAFTA collapse, in turn shining a bearish light on the broader transportation sector. (See also: Tips for Trading the Dow Jones Transportation Average.)
Kansas City Southern (KSU) has the most to lose from NAFTA's collapse, with the railroad's north-south orientation carrying huge loads between treaty participants. The stock topped out at $125.96 in 2013 and built a broad topping pattern, ahead of a November 2015 breakdown that dropped the shares to a three-year low in January 2016. The subsequent recovery wave stalled at $100 three months later, giving way to broad sideways action that lasted into a June 2017 breakout.
The rally has stalled at the .618 Fibonacci retracement of the decline into 2016, raising the odds for a long-term top. However, sell signals will not ring out until the stock breaks two-month range support and the 50-day exponential moving average (EMA), which have aligned with the June breakout level. Long-term shareholders may sense that things are going wrong, with on-balance volume (OBV) posting a two-year series of lower highs that indicate steady distribution under the surface. (For more, see: Kansas City Southern Announces Dividend Hike and New Buyback.)
Ford Motor Company (F) makes Mexican parts for U.S.-built automobiles as well as complete assemblies for U.S. and Canadian sales. A disruption would come at the worst possible time, with the auto industry struggling at the tail end of a long economic cycle. Ford shares topped out in the upper teens in 2011 and tested that level in 2013 and 2014. A downturn into 2015 caught fire, dropping the stock to a 2.5-year low during the August 2015 mini flash crash.
A bounce into October 2015 printed the highest high in the past 22 months, ahead of a lazy downtrend that has now reached the 2015 low. A breakdown could drop the stock into the single digits and support at the 2011 and 2012 lows near $8.90. OBV has carved out a more ominous long-term pattern than price action, posting an endless series of lower highs since topping out in 2013. (See also: Mexico Auto Exports Rise in July, but Pace of Growth Slows.)
Nasdaq-100 component and America's largest trucker J.B. Hunt Transport Services, Inc. (JBHT) stands to lose huge Mexican traffic – both northbound and southbound – in a trade dispute. Lower volumes would depress healthy profits reported in recent years and could send the stock into a tailspin that equals or exceeds the 30% haircut taken during the 2015 decline. Other truckers could follow suit and send the Dow Jones Transportation Average into a bear market.
J.B. Hunt stock topped out at $92 in April 2015 and sold off to the low $60s in January 2016. It returned to the prior high in December 2016 and broke out, reaching an all-time high at $102.38 and turning tail in a failure swing. That bearish impulse reached a six-month low in the mid-$80s in May, carving a higher low ahead of a recovery wave that is now challenging the 2016 high. The rising trendline since May should offer useful guidance if a trade war erupts, with a decline through $90 setting off major sell signals. (For more, see: J.B. Hunt Stock Falls on Q2 Earnings, Sales Miss.)
The Bottom Line
NAFTA negotiations could break down in coming months, inducing the president to sign an executive order that voids the trade pact and sends affected equities into declines that could yield rewarding short sales. (For additional reading, check out: White House Said to Be Mulling Withdrawal From NAFTA.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>