In early November, I (Jeff Bailey) felt that General Electric (NYSE:GE) would have a major impact on the Dow Industrials and the broader market and give us important insight into what lay ahead. That has one subscriber (maybe more) wondering if the recent weakness in General Electric (GE) is a sign of bearish things to come.
As I look at GE here at $40.41 I don't have the belief that the recent "failure" at $41.86 is bearish. It's not bullish, but it's not what I'd consider bearish either. Look at the anemic volume in this Dow component so far this week. Is the anemic volume because the market doesn't care about GE? Hardly. I think the lack of volume is because the bulk of institutional traders aren't around right now and are taking the week off. The last decent day of volume was last Friday (Dec. 21st) and since then the stock has barely been able to trade 15 million shares. The 3-month average daily volume for GE is about 19 million shares.
I felt that move above the $40 level on November 8th was really going to be a sign of bullishness for the Dow Industrials. While the stock did make gains from there near the $42 level, the rally died and the stock pulled right back into the base it was building before the break above $40.
If anything, the current action in GE is rather "neutral." Based on retracement, I'm thinking "bullish" above the $42 level and I sure as heck want to see what kind of volume is created on any move above the 200-day MA. VOLUME indicates interest.
Make no mistake about it. I'm a supply and demand guy. That's all I care about. Volume tells me about interest and disagreement. For every buyer there is a seller. ANY transaction in the market is disagreement. If you sell a stock and I buy that stock from you, we disagree on things. You obviously think the stock might go lower and therefore you're now taking your profit and leaving, or keeping a loss small. I (as the buyer) am willing to take on the risk of owning the stock as I now enter with a different price level and different risk/reward trade/investment.
Based on this belief... I would be "bearish" on GE on a move much below the $36 level and get more bearish should the stock break below $34.75. The chart of GE looks like the stock is simply being worked between $36 and $42 right now and it is range bound.
This type of action (if it continues) will most likely keep the Dow Industrials held in check. It makes sense to me that all things being equal, if GE was trading $45 like I thought it would after the break of $40 that the Dow Industrials would be trading at or above their 200-day MA.
Now is a great time to test that theory. GE is nowhere close to $45 and the Dow Industrials are trading right on their 200-day MA.
Now I'm thinking.... "hey, if GE is still lagging at $40 and the Dow is trading a level I thought it would with GE at $45, then something bullish must be taking place in the Dow." This is simple logic, but remember, I'm a rather simple supply/demand guy.
When I first started talking about GE, the observation was also made that this was perhaps the most broadly diversified Dow component that had its finger in just about every piece of "economic pie." That "economic pie" isn't located just here in the U.S., but throughout the world!
Perhaps "GE's underperformance" is this and where I need to make some adjustments in prior thinking. I do think the U.S. economy needs to recover first in order for the rest of the world's economies to improve. This doesn't HAVE to happen, but is a highly likely event that would take place for a global economic recovery.
I now have to "question" my previous observations and analysis toward GE. Does GE necessarily have to be a "leader" for the markets here in the U.S. to do well? Obviously not. The Dow has achieved its 200-day MA without the help of GE. GE hasn't really hurt things as the stock is trading right near where I felt a bull should be bullish.
So what's wrong? I'm starting to think that GE's "size" and exposure around the world may be a pull on the stock right now. I think there are some signs from the MARKET that the U.S. economy is on the mend and improving. I'd point to the performance of the Russell 2000 (RUT.X) and how strong that index has traded. These are "smaller" companies with very less global exposure or at least not having a finger in every slice of economic pie. Perhaps GE's "finger" in many world economies and sectors of those economies is not found attractive among institutional money managers at this time. GE may well be an investment for those looking much longer-term on a scenario based of global economic recovery (perhaps 2 year from now).
Do you remember September 2000? GE had just set a new 52-week high. We couldn't go too many days without hearing somebody talk about how well GE had performed in the scope of the S&P and NASDAQ's recent decline. How could that be? The S&P 500 Index had hit its 52-week high in late March of 2000, then rallied back near those highs in September of 2000, but failed and the rest is now known. Could it be that in September of 2000, GE was squeezing the last bit of juice from a longer-term global economic boom and was one of the last "big guns" to suffer the consequences of a global economic slowing? I think so.
Perhaps in the scope of "cycles" it may also make sense that GE may be one of the last to experience the "growth" of a global economic boom! It should also be known that I'm a BIG BELIEVER is market/sector/stock rotation. Institutions are smart. They don't always tell us in the media what they're doing. Far be it from them to buy some small cap stock at $10, see it run to $30, tell everyone how great it is and what type of growth they've experienced then dump it at $30 and rotate to another market/sector/stock that now looks to benefit from their past successful scenario.
When I say "market" I mean foreign markets or even the bond market. It is now rather obvious that "smart money" began rolling out of stock in late 1999 and early 2000 and buying the higher YIELD of U.S Treasuries. Yes, "smart money" may have sold too soon in late 1999, but a year later they sure hadn't missed much in the stock market. YIELDS were then lower and stocks began to suffer.
It's only been since early November that we've started to see that pattern begin to reverse itself as bonds are started to see selling and stocks have recovered somewhat.
I still believe we can derive some "market direction" from a stock like GE. My thinking now is geared toward. The more bullish GE does, then the stronger the world/global economic picture is. That type of action is perhaps the "most bullish" scenario for the broader stock market as it would indicate to me that the world economies are doing well. Not necessarily all of them, but the BULK of them.
GE can still benefit from a U.S. economy doing well, but a "lagging" of GE to the broader market perhaps now tells me that the "global" picture isn't all that strong.
Right now, I think this is exactly what GE's stock price action is telling me. For you and I, it perhaps solidifies the belief that we should be looking to lock in some gains of 7-10% if we get them in a short period of time, or at least move up some stops.
If we were to see GE get above its longer-term moving average (the 200-day) on BIG volume (50 million +) then I truly begin to think the MARKET knows of a global economic expansion in the making.
In a way, all this talk of GE is rather "fundamental" on a macro level of economics. Yet the only way I know to truly test this "macro" economic belief is through the chart of GE.
Perhaps it is interesting that I was "quite bullish" on GE on the first break above the $40 level. At that time, I think I felt the price action taking place on the break above $40 was a message that "a run to $45 would have the global economy looking bullish." Now we have just about two-months worth of trading action to have observed in GE. This past move above $40, I did mention that it was most likely bullish for the Dow Industrials, but I wasn't as "bullish" on GE for a trade. I must admit, I wasn't thinking bullish/bearish on GE this last move back above $40 as I just didn't like the technicals of a $41.85 resistance level. What if the stock turned south at $41.85 again? Stop out for another 10-cent loss at $39.90? No thanks. At $39, if there's nothing else that "excites" me, then I might well consider GE as a bullish candidate. We know there are sellers near $41-42 and can assess risk/reward much better.
We will have a good test for GE in the not to distant future. On the recent pullback, the stock did violate its 50-day MA. For signs of strength, monitor the stock should we get a test of that 50-day MA again. If we do get a test and a subsequent hold, then we're perhaps going to be getting a message that some bullishness is starting to take hold in the stock.
For now, I'm going to adjust my scenario that GE is a bellwether for the U.S. economy. While it is in part a bellwether for the U.S. economy, I do think we have to take into consideration (on a more meaningful level) that this stock may well be a bellwether for the "global economy."
This may now give some insight into what type of stocks we look to play bullish near-term. Perhaps the Russell 2000 Index (RUT.X) is telling us that the bullish play is on the U.S. economy right now. This "smaller cap" index is really outperforming the other broader market averages. The bullish play may well be in those stocks that derive less than 1/2 or 3/4 of their earnings/revenues from overseas markets or focus on stocks that serve a more "niche" market or focused segment of an economy. It may be that GE is just "too big" right now for a slow global environment, but when that global picture begins to recover, then it's time for GE to be an out performer.