General Electric (GE) Has Become an Exercise in Risk Management: Market Recon

You kids long General Electric (GE) ? Really? Me too. The point is that you are not alone. I got myself in a little early, thinking Warren Buffett getting out (the removal of a sizable chunk on the offer side) of the name and Jeffrey Immelt taking his leave to both be positives. Buffett timed his sale better than I timed my entry, but I still believe the latter to be positive, as I have found it easy to get behind John Flannery’s pragmatic yet aggressive style of leadership. Is he, indeed, the right leader? We’ll let you know down the road. For today is the big day that Flannery pointed to as when he would update investors on his broad review of this sprawling (not in a good way) corporation.

The shares are down 35% this year. For comparison’s sake, the S&P 500 has gained 15% over that time. The Dow Jones Industrial Average debuted in 1896. GE is the sole remaining member of the Dow’s original line-up. To put this in perspective, the Baltimore Orioles won the National League pennant that year, and the USS Maine would still not sink in Havana Harbor for another two years. Does GE’s membership in this blue-chip index now have an expiration date? With a share price that has withered, that decision may boil down to what John Flannery lays out as a future path for this corporation.

How much can a chart help one trade a stock when the underlying fundamentals of a company are about to drastically change? The answer for me, is that fundamentals always in the end, trump technicals. That said, technicals can never be completely ignored, especially in the modern era, where algorithms play an ever-increased role in price discovery. Algos, and the kids that write them read charts.

Still, knowing that a firm is about to alter its own fundamentals, I would focus more on what I call “strategic” indicators such as Fibonacci levels and Pitchfork Models than I would on “tactical” indicators such as Relative Strength, and the moving average convergence divergence (MACD). Money Flow indicators remain important to me as well.

You may recall that in the past I have laid out a price target of $28, an aggressive target of $34, and a panic point of $19 for this stock. I will now have to scrap those levels, as they are no longer valid in my opinion.

Both a 38.2% retracement from these lows, and the Pitchfork suggest that any short-term pop in the share price of GE will die out at a very optimistic $24. That now becomes my target. I will not be so bold as to plan an aggressive target at this point. My panic point would now drop to $18 as that is what the Pitchfork suggests.

Now, as a trader, I have left myself plenty of dry powder, only purchasing a rough 40% of my original intended long position, and I have greatly reduced my cost over time by writing options strangles against the stock. My average price is now down to a smidge above $23. The $18 level does not mean that I have to bail. It simply means that I have to make a decision given the peculiar circumstance.

This is no longer an investment for me. This has become an exercise in risk management. Either way, this could be fun and challenging.

(This is an excerpt from Stephen “Sarge” Guilfoyle’s Morning Recon, which now appears exclusively on Real Money, our premium site for active traders. Click here for a free 14-day trial and receive Morning Recon every day, along with exclusive columns from Jim Cramer, James “RevShark” DePorre, technical analyst Bruce Kamich and more.)

More of What’s Trending on TheStreet:

Source

SHARE

LEAVE A REPLY

Please enter your comment!
Please enter your name here