Carmaker shifts gears. Will traders hit gas?
02/06/18

General Motors’ (GM) story over the past six months consists of two basic developments: a straight-shot 31% road race from late-August to mid-October, followed by a nearly four-month scenic tour (maybe the GPS was broken) that brought the stock to the lower boundary of a wide consolidation on the verge of today’s earnings release. Regardless of what the numbers show, the next several days of price action could be interesting.

Other than a one-day pop above the trading range’s initial high in October (a classic “bull trap”), GM has mostly nudged to slightly lower lows and lower highs in five wide swings, with Friday’s big down day in the broad market helping to escort the stock to its lowest level since September.

With some weakness emerging in autos—sales dropped sharply in January vs. December (17.2 million annualized, which was the weakest number since August)1—GM’s recent stagnation might seem part-and-parcel to its industry’s perceived prospects.

As recently as January 16, though, GM had issued guidance that seemed to catch a lot of analysts off-guard—because it was so positive.2 The company intends to continue to focus on profitable trucks and SUVs, with increased profits earmarked for future electric and autonomous vehicles.3 And some analysts seem to buy into the storyline: As of yesterday, Bank of America, for example, had a price target of $57 for GM. Time to play a bounce off support?

General Motors (GM), 6/29/17 – 2/5/18

Source: OptionsHouse


Well, one thing that stands out on the daily chart is that the October 25 and January 16 highs were days GM released positive earnings and guidance; the other earnings date flagged on the chart, July 25, 2017, was a down day.

The weakness on and after these days doesn’t appear to be coincidental, at least judging by GM’s past 19 quarterly earnings releases. Here are few highlights of the stock’s performance after these events:

●GM gained ground (+0.66% average) in the five days leading up to earnings in 12 of 19 cases (63% of the time).

●In contrast, GM was down five days after earnings (-0.65% average) in 14 of 19 cases (74% of the time).

●GM declined an average of -1.08% from the open to the close on earnings day 13 of 19 times, and the first and second days after earnings closed lower 13 and 12 times, respectively.

It’s noteworthy that GM has beaten earnings in its past 10 releases, and beaten revenue estimates in eight of the past 10; the decline after the October earnings release, for example, occurred when the company beat both estimates handily. In other words, it doesn’t appear that bad quarterly headline numbers are responsible for the short-term bearishness than has often followed GM’s earnings announcements.

General Motors (GM), 4/2/12 – 2/5/18

Source: OptionsHouse


If GM’s price action after today’s earnings follows the pattern of the majority of past releases, it would play into a breakdown below the low of the trading range. The long-term weekly chart above shows the stock has already pulled back below the late-2013 highs, but there is still room for it to retrace to the level of the 2017 or 2015 highs (approximately $38.50-$39) without pouring sugar into the gas tank of a longer-term uptrend.

Keep in mind, however, that no stock is an island, at least not all the time. With the broader market still (as of yesterday) in its first significant pullback in months, GM would appear to be facing near-term headwinds. But it’s equally true that if the pullback ends with a strong short-covering rally, GM could likely be along for the ride.

 

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1 Econoday. Motor Vehicles Sales. 2/1/18.

2 Reuters. GM sees flat 2018 earnings, with sales of pickups picking up in 2019. 1/16/18.

3 Forbes. Why GM Is So Bullish On The Future—And Why You Should Believe It. 1/16/18.