Bears come back to auto space

Auto stocks have been skidding, and now one big trader is bracing for a potential drop.

A combination of weakening sales and credit worries have recently hit the sector. Companies ranging from carmakers, dealerships, and parts suppliers have stalled in the last month, and yesterday’s option activity was looking for an acceleration lower in industry leader General Motors (NYSE: GM).

A trader bought roughly 11,000 June 31 puts for $0.57 and sold a matching number of April 34 puts for $0.49. Puts are options to sell a security at a specific price over a certain period. They can appreciate when shares lose value, so can be used to hedge or speculate on declines. But if no drop occurs they’ll be rendered worthless by time decay.

In the case of Monday’s transaction, it appears the investor previously owned the April contracts and rolled them forward to June. That will save them from a potential total loss if GM’s above $34 when the puts expire next Friday, April 21. Making the adjustment cost an incremental $0.08 and provides exposure to at least three more likely catalysts:

  • April 28: First-quarter earnings
  • May 2: April monthly sales report 
  • June 1: May monthly sales report

Some technical analysts may also see ominous signs in GM because it’s formed a potential “descending triangle” in the last month. That’s when a stock makes lower highs while holding one level. The key point around $34 is both a peak from mid-November, and also the stock’s 200-day moving average. Price alerts may ring across the market if that area is broken with conviction.

GM 6-month chart

Source: OptionsHouse by E*TRADE

GM rose 0.77 percent to $33.97 yesterday. It began 2017 on a positive note amid hopes of strong truck demand and improving global sentiment. That lifted the stock to its highest level in almost two years by early March, but then came a stream of negative headlines. 

First, rival Ford Motor (NYSE: F) cut guidance.1 Then, credit analysts questioned the loans backing many vehicles.2 Next, Barron’s slammed auto dealer CarMax (NYSE: KMX).3 Finally, vehicle sales for March missed estimates, and are now being viewed as a high-water mark for the entire industry.4 All told, GM is down 8 percent in the last month, while the broader S&P 500 has been flat over the same period.

In addition to those setbacks, some experts have said investor sentiment is now shifting in favor of electric-car upstart Tesla Motors (NASDAQ: TSLA).

In summary, the backdrop has quickly darkened for traditional automakers like GM, and yesterday at least one big option trader looked for things to get worse before they get better.

1. Reuters: Higher investments, sales drop to weigh on Ford first-quarter earnings. 3/23/17.

2. Auto-loan market stuck on risky 'trade-in treadmill,' says Moody's: 3/27/17.

3. Barron's: CarMax Could Stall as Risky Loans Rise. 4/1/17.

4. Reuters: U.S. March auto sales indicate long boom cycle may be waning. 4/3/17.