What S&P 500 Companies Are Afraid of the Big Bad Border Tax?

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EDITOR’S NOTE: Sam Collins will return on Feb. 21.

In January and earlier in February, companies with the most to lose from a tax in imported goods were falling precipitously. These companies included manufacturers who have outsourced production to Mexico and Asia like Ford Motor Company (NYSE:F) as well as those that import products to sell at the retail level like Wal-Mart Stores Inc (NYSE:WMT).

The plans for the border tax haven’t been fleshed out with a lot of details. The proposals range from a 20%-35% tax proposed by President Donald Trump to a similar sounding “border tax adjustment” under consideration in Congress.

The benefits or drawbacks of such plans depend (as always) on a variety of factors, including the potential for reciprocal actions by the U.S.’ trading partners.

While the tax proposals lacked detail, investors still responded by targeting companies that had specific exposure to greater import costs that are unlikely to be offset by passing higher prices onto customers.

At this point, it seems very likely that the market overreacted to the potential for these plans to be implemented in the short-term (or ever).

As you can see in the chart below, Walmart was sold when the border tax proposals were hot news, and has suddenly popped to the upside as the consensus has shifted further towards the probability that the tax will NOT be implemented — at least not right away.

wmt-021017-chartWalmart (WMT): Chart source – TradingView.com

To be clear, we aren’t making any statements about whether border taxes are good or bad at this point. Historically, the result from higher tariffs have been higher prices and slower economic growth and trade. However, the current proposals aren’t detailed enough to draw strong conclusions about how it would be different this time.

What does seem clear is that if traders are less uncertain about border tax plans, large swaths of the major indexes (retail, manufacturing, energy and technology) should catch a bid over the next two weeks. It will be challenging to put solid numbers behind that forecast however, because the original discounting was based on information that lacked much real detail itself.

Technical analysis should help us make a more reasonable estimate now that there seems to be some bullish momentum in the market. We recommend using a conservative “measure rule” based on the trend segment that led to the ascending triangle on the S&P 500 in December and January. In this case, rather than projecting the full distance of that prior trend from the breakout price (~$2,278), we are using the 61.8% Fibonacci distance instead for a target of $2,335 on the S&P 500.

spx-chart-021017S&P 500 (SPX): Chart source – TradingView.com

Conclusion

While bullish momentum had a lot more apparent commitment on Wednesday than we have seen so far in February, there is still a high probability for price shocks from Europe and Asia. Of course, we also can’t forget that if Washington starts to promote the border-tax plan again, this rally could be spoiled very quickly.

We think the breakout is compelling, but we would recommend extreme caution and a focus on fundamentals for any new buys.

InvestorPlace advisors John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.

Today’s Trading Landscape

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