General Electric (NYSE:GE) is an important stock. Let's call it a barometer for the broader market and economy. Its market-cap of $369 billion is the largest in the U.S. market. For that reason, GE is the largest component of the market cap-weighted S&P 500 (SPX).
The company is diverse. GE is involved in appliances, lighting products, medical equipment, nuclear power services, aircraft engines, plastics, and of course NBC, among many other business lines. It will record about $135 billion in revenues this year and about $1.40 in earnings per share.
According to the Chief, Jeffrey Immelt, GE will in fact hit its financial targets this year. Immelt reaffirmed GE's targets through an internal e-mail this morning, which was quickly leaked to the financial press. Despite the reaffirmation of guidance, the stock isn't responding.
GE began its most recent pullback on November 27, at which time the stock hit a relative peak above $41. It was never able to advance past the $42 level. The following five days saw GE sell-off to its current level, at which it has spent the last five trading days.
During the period from November 27 until now, GE lost a significant amount of relative strength versus the SPX. One would think that the largest, arguably best-run company would participate in any broad market rally. But that hasn't been the case recently. Granted, the SPX has pulled back in the last three sessions. But GE didn't participate in the rally early last week. The line chart below depicts GE's loss of strength relative to the SPX. The chart displays the price of GE divided by the price of the S&P 500 over time. (Note the reading today of roughly 0.0325: $37.25 / 1146 = 0.0325.)
The absolute value of the relative strength chart isn't of concern. What's significant is the direction of the line: Is it rising or declining? If the line is rising, then work backwards in the above calculation to arrive at the conclusion that GE is out performing the SPX to the upside. Conversley, if the line is declining, then GE is out performing to the downside.
Since December 5, GE has gained a small amount of strength relative to the S&P 500 because the stock has traded sideways. Does that mean its trend of under performing the S&P is about to reverse? It's too early to come to that conclusion. But it's possible that Immelt's reaffirmation of guidance this morning will embolden the buyers over the coming days.
It's also possible that Immelt's modestly upbeat comments weren't enough to embolden the buyers. Many analysts have recently suggested that GE is priced for perfection, that the stock already discounts next year's double-digit growth. Whether or not GE is perfectly priced is open for debate. I'm not smart enough to know if GE is perfectly priced. But what if it is? What implications, if any, would that have on the S&P 500? What would GE's perfect price say about the economy?
The company is one of the most levered to the business cycle because of its diverse operations. Jack Welch, the famed GE CEO who just retired, was one of the first business leaders to call the recession. From that call, I would say that GE has its thumb on the pulse of the economy. How then do we interpret the guidance from Immelt this morning and, more importantly, the market's response?
Could it be that the market already knew GE would hit its financial targets for 2001? Could it be that the economy is going to rebound next year, but not by a very large amount? Or could something unforeseen take place? Could the recession last longer than expected? Anything can happen. It's important to ask the questions.
Find the answers to those questions, however, is the difficult part of the process. But I believe GE can help. The stock's loss of relative strength since November 27 may portend of period of consolidation for the broader market. What may be even more telling is if GE breaks down below its near-term support level at $36. Such a decline may portend more of a protracted pullback in the SPX.
I don't know what it is with me and noticing these price patterns recently, but I can see an interesting pattern developing in GE on its daily chart: the dreaded head-and-shoulders.
After hitting its September 21 low, GE traded up to $40 (A) in mid-October. From there it consolidated, then went on to rally up to the $41.80 (B) level, from which it recently pulled back. With the left shoulder and head traced, only the right shoulder needs to be traced for the head-and-shoulders pattern to be completed. The right shoulder would be formed with a rally from current levels and subsequent rollover from $40 (C). The neckline of the pattern, in my estimation, sits right around $36 (D).
Whether you believe in the voodoo of technical analysis or not, the price action in GE recently and the outcome of its pattern may help to answer some of the above asked questions. Of course the head-and-shoulders pattern needs to be completed first. If the pattern is not completed, then we'd have to augment our conclusions around whatever takes place in the stock in the next several weeks.
For instance, if GE breaks down below the $36 neckline before tracing its right shoulder, then we might conclude that the economy is going to be weaker-than-expected next year. If the stock rebounds from its current levels and proceeds to advance past the $40 level, thus rejecting the head-and-shoulders pattern, then we might conclude that the economy is going to be stronger-than-expected next year.
But what if GE does complete its head-and-shoulders pattern by rallying from its current level and subsequently rolling from $40, where it goes on to decline below the $36 neckline? Then things become more complicated. One scenario that could explain such an outcome would be a final push higher into the end of the year by the fund managers, whereby the move wouldn't be fundamentally justified and lead to a sharp sell-off early next year. What's disconcerting about that scenario, where GE's head-and-shoulders would be completed, is that the pattern would have a bearish price objective of roughly $30. That's down around the September 21 lows!
The beautiful thing about the market is that the future is unknown. All right, maybe that's not necessarily a good thing. But it does allow a trader to frequently adjust his or her scenarios and conclusions. For instance, GE's under performance relative to the market recently could strengthen the case for a breakdown below the $36 neckline. But the relative strength dynamic can reverse in a matter of days, which is why traders need to remain adaptable and flexible. No matter the outcome, I believe GE will help you to arrive at a more intelligent conclusion about the health of economy and market next year.