Investors are worrying about the trade war, so they started taking profits.
The S&P 500 Index lost as much as 5% since the first warning of escalation 10 days ago.
Good.
The iShares China Large-Cap exchange-traded fund (ETF) dropped twice as much. This ETF tracks some of China’s biggest stocks.
Even better!
Now, I don’t wish losses on you or your investments.
But price action — the rise and decline of prices — is part of a natural cycle that keeps trends healthy.
And the faster stocks decline, the more likely the uptrend is to resume.
I like to refer to the price action as behavioral price cycles. And I want to share how you can use these price cycles to go against the market’s sentiment and make money.
Get ready for a chance at double-digit profits made possible by frightened investors…
Escalation May Hurt the Economy, but the Market Will Get Over It
The United States accused China last week of backpedaling on key commitments it’s made in trade negotiations.
As a result, the Trump administration made good on its threat. It increased U.S. tariffs from 10% to 25% on $200 billion of Chinese goods.
This week, China hit back.
It increased tariffs from 10% to 25% on $60 billion of U.S. goods.
Stocks are on the decline. And the iShares China Large-Cap ETF is among those falling prices.
Take a look at this ETF price chart. It shows the price decline for large-cap stock ETFs in the U.S. (the black line) and China (the red line). The U.S. ETF (SPY) fell 4.63%, while the Chinese ETF (FXI) fell nearly 10% since the trade war flared up.
Investors fear the trade war will cripple both economies … and the global economy.
Last year, U.S. exports of agricultural products to China dropped 62.7%. Soybean prices are crashing.
Crude oil and natural gas exports to China sputtered to a halt in the second half of 2018.
China’s exports to the U.S. are down 9.7% year to date, a trend that began in December 2018.
Increased tariffs could worsen the economic stress.
The Storm Before the Rally
Markets are on a good run in 2019.
But investors got surprised by the trade war news. And they got scared.
They sold … and the markets declined.
This needed to happen.
Investors acted as if the trade war would have the ideal resolution: The U.S. and China would agree on a deal in everyone’s best interests. Risk disappeared and shares climbed.
But the opposite happened. China and the U.S. did not reach a deal, and now the market is adjusting.
Fear is a powerful emotion. U.S. stocks are falling about 2.5 times faster than the preceding climb.
That’s the nature of a correction. Prices fall faster than they rise.
This means buyers will take back control of this market soon.
And it’s where we get our chance to make money.
Investors Are Scared: Make Your Move
I’m not ready to say the worst of the trade war volatility is behind us.
So, there’s no reason to rush headlong back into the market just yet.
Washington, D.C., is preparing to apply even more tariffs on the remaining balance of goods China exports to the U.S.
That’s about $300 billion worth, if needed.
And more tariffs will shake the market once announced.
But I don’t think volatility will last much longer after that.
China doesn’t have the firepower to retaliate because it imports far less from the U.S. than it exports to the U.S.
Once investors price in this potential, we’ll have a chance to buy back in.
You can jump back into U.S. stocks. They’ll be less risky.
But if you want to capitalize on investors’ fear, consider betting on China.
The iShares China Large-Cap ETF (NYSE: FXI) is an easy way to make sure you’re holding a basket of large-cap Chinese stocks. And I think it will climb 15% by the end of the year.
Good investing,
John Ross,
Senior Analyst, Banyan Hill Publishing