Signing the China Trade Deal Could be a “Sell the News” Moment – Here’s What To Do

There’s an old market adage that says, “Buy the rumor, sell the news.”

Simply, it means that short-term traders should buy the stock of a company on rumors of catalyst events that would be beneficial for the company, such as acquisitions or new product launches.

As excitement for the event rises, so too does the stock price as investors pile in. Traders then hold their shares until shortly after the event (the “news”) occurs.

It’s a fairly basic strategy, but one that can yield big returns. Let’s use Apple (AAPL) – a company that has had its fair share of exciting new product launches over the years – as an example…

It’s fair to say that the Apple iPhone was the first of its kind. Sure, earlier iterations of “smartphones” had been sold in years past, but none with the full suite of capabilities of the iPhone.

From January 9, 2007, the date Steve Jobs first introduced the world to the iPhone, until its release date on June 29, 2007, AAPPL stock rose from $10.75 to $15.41 – a 43.34% increase.

Now, you may be asking yourself, “The iPhone was an incredible success, why would I sell shortly after the release date?”

Well, as with many “news” events, the reality often doesn’t live up to the hype. In fact, AAPL shares only gained seven cents on the day of the release, as sales numbers initially disappointed.

There are a litany of other examples of shares disappointing after the company’s big “news” day because reality didn’t meet up with expectations – something I like to call a Reality Gap.

And tomorrow could mark one of the biggest “sell the news” days in years.

Here’s how you can profit from it…

The Hype Machine Behind the China Trade deal

Wednesday is make-or-break time for the markets’ short-term direction, and you need to be ready.

That’s when China and the U.S. will finally sign the “phase one” trade deal. Ever since the deal was announced on December 13th, markets have been on a tear.

And no wonder, as we’ve been promised a lot by negotiators from both sides: China buying $200 billion of U.S. goods including agricultural products from farmers, clamping down on theft of intellectual property, and reducing tariffs.

But even as the markets pushed higher on optimism about this deal, very few details have been released.

The reality gap between the market’s overwhelming optimism about the deal and the warts that we’re sure to find when the details are revealed give us a classic money-making opportunity.

As long as the deal was in the future, that was fine. Traders could optimistically read into it whatever they wanted.

But once the deal is signed tomorrow and the details are made public, that will all change. As fantasy turns into reality and the actual terms are released, warts and all, there will almost inevitably be some disappointment.

In other words, traders have already bought the rumor of the trade deal. Come tomorrow’s signing, they may well decide to sell the news.

Here are the best trades to look at right now to prepare…

Trader Expectations are About to Meet Reality

As we’ve talked about before, the trade war with China has impacted a lot of Americans from consumers to farmers.

So whatever is in the Phase 1 trade deal, we know that at least the basics are good. Fewer tariffs and more trade opportunities for American businesses and farmers is what large parts of America need. And reducing the punitive tariffs will certainly help China’s economy and the global economy, by extension.

What little we do know is that China has agreed to buy $50 billion more in energy and $32 billion more in farm goods, all from the U.S. over the next two years. But the details of how exactly they’ll achieve that will be crucial.

On Monday afternoon, the White House removed China from its list of currency manipulators, paving the way for signing the deal and for future negotiations.

And yesterday, news leaked that China and America are restarting their semi-annual discussions on economic issues, abandoned three years ago. This Comprehensive Economic Dialogue will be a key avenue for heading off trade issues in the future before they turn nasty.

These are all great signs that the trade deal will hold, and negotiations for “phase two” will be off to a good start.

But that doesn’t mean tomorrow’s deal will be perfect.

Remember, with the presidential election less than a ten months away, President Trump needed a win on trade. The Chinese government knew as much.

Meanwhile, their own economy has been showing signs of improving after having been hit hard by U.S. tariffs. Just today, numbers revealed that China imported 9.5% more oil in 2019 than the year before, marking the 17th straight record-setting year.

Also from numbers released this morning (Tuesday), China’s exports improved a last month, aided obviously by the suspension of tariffs. And copper imports, a key signal of economic strength, were up 9.1% last month, hitting the highest number since March 2016.

So, the table is set for high expectations on good news for tomorrow.

That’s exactly why seeing the details of the deal tomorrow will be so important. It’ll let traders finally decide that, while it’s good to get the first phase done, the big run-up in the markets in the last month has likely been overly optimistic. Any little “less than perfect” part of the deal will give investors pause. Especially whether the deal includes enforcement mechanisms in case China decides to skirt its commitments.

Like any deal, there’ll be some good parts and some bad. And the markets have gone up quite a bit since the deal was first announced last month:

That means that the market has priced in a deal that is heavily tilted toward good outcomes for both the U.S. and China. Rumor already has it that the really tricky issues about Chinese state subsidies and theft of U.S. trade secrets will be dealt with later, after the U.S. presidential election.

Exactly how much is being kicked down the road will be key. It’ll decide whether traders think the rally since December is justified, or whether they better take their profits now.

It’s all about the reality gap between expectations on the one hand, and the truth on the other.

This means the market could react negatively tomorrow. When traders have to deal with the actual concrete details of the trade deal rather than their idea of it, they may well decide to instead take some short-term profits that the rumors of the trade deal helped to create.

“Buy the rumor, sell the news,” as the old Wall Street saying goes.

For you, in the very short term, that means keeping your trades on a short leash. Rein in your riskier trades for a bit and focus on stocks that will be less affected by trade with China if you have to put on a trade before the details of the deal are announced.

Here are three ways to play this. Last fall, when the trade troubles were slamming the market, then jamming it back up, then slamming it again, Stealth profits traders made money on both sides of the deal by buying calls on Apple (AAPL) and puts on Deere & Co. (DE). On the next tariff tantrum pullback, the DE puts made a 100% gain and the AAPL calls did not drop enough to hit their contingency exit. Then, on the next leg up the AAPL calls hit their 100% profit target. That would be one to play the upcoming news, though with a higher risk profile.

A second way to play this is to buy a stock with no China exposure. Southern Company (SO) is a strong utility that makes all of its revenue in the U.S. and is a “flight to safety” trade that has made 100% gains for us this year.

A trade that our Betaflow traders have cashed in twice for 100% gains is BAC, which has little direct China exposure. If we do get a “sell the news” pullback, buying shares or call options on this strong bank would be a good way to play the rebound.

Make sure you get all the latest news and updates on the full launch of BetaFlow, which has averaged more than one gain of at least 100% or more every week since it began, by joining the mailing list today.

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Great Trading and God bless you,

 


D. R.

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