The stock market popped on Thursday after a report from the Wall Street Journal suggested U.S. officials may lower tariffs on China during trade negotiations as an incentive to hatch a longer-term deal.
If a deal appears to be getting close, there is a possible game plan for traders.
"Any deal would likely see a relief rally as we believe markets have meaningfully priced in risks of trade tensions escalating," said Ben Laidler, HSBC's global equity strategist, in a note Tuesday. He also pointed out that tariff-sensitive stocks have underperformed significantly and their valuations are getting cheap.
To find the best names to buy on a trade deal pop, HSBC ran a screen looking for stocks with three main attributes:
- Listed U.S. stocks with revenue exposure to China of more than 20 percent.
- Underperformance during this three-month market pullback on trade deal concerns.
- Cheap valuation on a forward price-earnings basis.