MorningWord 2/4/14: Dude, Where’s My Car? – $F $GM

by Dan February 4, 2014 9:25 am • Commentary

Yesterday the major auto companies reported sales for January that came in far worse than analysts had expected, capping a multi-month string of disappointments since posting record monthly sales back in August. As you would expect, analysts have a pretty decent answer for the miss, weather. But I suppose it probably also has something to do with the fact that the U.S. consumer is kind of “full up” with new crap. The second half of 2013 might have been somewhat of a last gasp of purchasing en masse for a while.

GM has massively under-performed Ford year to date, down almost 14% (giving back the prior 3 months’ gains in one month) vs. Ford down almost 6%, but this comes after GM’s out-performance in Q4.  Both stocks had monster years in 2013.  GM became a bit of a story stock last year as the U.S. government sold out of their bailout stake.  Investors looked forward to a leaner, far less debt ridden company, which resumed share buybacks and dividends and was looking to execute on the second phase of a momentous turnaround under a new CEO.  As most story stocks do, GM became a very crowded trade as evidenced by options open interest, where eight of the top 10 largest lines are calls:

-Jan15 40 calls: 69,000

-March 40 calls: 52,000

-March 42 calls: 50,000

-March 37 calls: 40,000

-March 45 calls: 38,000

-Jan15 50 calls: 36,000

-March 41 calls: 35,000

-March 39 calls: 34,000

Yesterday, the stock broke and closed below a key momentum indicator, the 200 day moving average (yellow below), the first time since September 2012, and closed just above key near term support at $35. From a purely technical standpoint, $35 is a big level to hold as there is no real support until the low $30s, particularly the May breakout level.

GM 1yr chart from Bloomberg
GM 1yr chart from Bloomberg

Yesteday’s price action caused a flurry of options activity in the name.  Just as it seemed like there was nothing but upside call buyers on the way up in Q4 (as evidenced by open interest above), a day like yesterday it felt like there was nothing but bearish positioning (aside from one).  From yesterday’s Too Many Options post:

Interestingly calls out numbered puts at almost 1.5 to 1, but much of the activity was bearish.  In the morning there was a seller of 24,000 March 42 calls at 13 cents to close when the stock was $35.42.  While these are very cheap options from a premium standpoint, this sale is pretty much a trader throwing the white flag up on their trade, getting whatever they can for the options. In a much more bearish trade, there was a buyer of 20,000 Feb 7th (this Friday expiration) 35.50 strike puts paying 1.07 to open.  This could be protection against a long position or obviously just a short term bearish bet.  There was a seller of 12k June 40 calls at .89 to close.  There was one bullish trade that stuck out in the afternoon where a trader bought 8k March 38 calls for .62 to open.

Expectations are much lower today than at the start of the year, ahead of GM’s earnings report on Thursday morning.  However, a lot of technical damage has been done.  We’re still holding the March 40/45 call spread ourselves, but at least our trade had limited downside.  The 15%+ selloff from the December highs is more painful for those trying to catch a bottom.  We might look to adjust our position ahead of the event, in which case we’ll be sure to update on the site.