Chart of the Day – General Electric (GE)

by riskreversal December 14, 2016 12:07 pm • Chart of the Day

Shares of General Electric (GE) have spent the better part of 2016 trading in a fairly tight range between $28 and $32, now approaching the upper end:


To my eye, a rejection at $32 and you have the potential for a retracement back to at least $30 and possibly a re-test of the late October lows near $28, which would likely set up as an attractive long entry at 2 year technical support.

Shares of GE have massively under-performed the broad market, up only 1.5% year to date, vs the XLI, the S&P Industrial etf (of which it is a 10% component) which is up 22% ytd and the S&P 500 (SPX) which is up 11%.  One reason for this might be the headwind of the recent strength of the U.S. dollar to company’s 55% exposure outside the U.S.  Even with the lack of performance in 2016, shares of GE trade 19x, which ain’t exactly cheap for a very slow growth industrial stock.

Short dated options prices in GE are relatively cheap, with 30 day at the money implied volatility at 15% (blue below) in line with 30 day realized volatility (white below, how much the stock is moving), making options prices look fair to cheap for those inclined to use options to make long premium directional bets:


The next identifiable catalyst will be Q4 earnings on Jan 20th before the market open, the day of the Presidential inauguration. With the stock at $31.50, the Jan 20th 31/32 strangle is offered at about $1, implying about a 3% move in either direction between now Jan 20th close. Seems pretty fair.

General Electric of course, is a member of the Dow 30. You’ll be hearing a lot about the Dow Jones Industrial Average into year end as Dow 20,000 is in sight. As you probably know, the DJIA is unique amongst the major averages in that it is price weighted, not market cap weighted. What that means is a $200 dollar stock has 10 times the impact on the average than a 20 dollar stock. Yeah, pretty stupid. But it’s tradition, like predicting weather with a groundhog in a top hat.

Another tradition is the “Dogs of the Dow”. That theory is to buy, under performing, high dividend yield, big cap stocks, as…

a high-dividend yield suggests both that the stock is oversold and that management believes in its company’s prospects and is willing to back that up by paying out a relatively high dividend. Investors are thereby hoping to benefit from both above-average stock-price gains as well as a relatively high quarterly dividend.

The idea is that you can play catch up to the rest of the market, as these dogs will outperform over time. There is criticism of the Dogs of the Dow based on the price weighted/cap weighted issue in comparison to the DJIA but that’s neither here nor there as there’s likely to be some catch-up sentiment among dogs if the market closes the year on highs, and goes higher to start 2017.

If we were inclined to play for an early 2017 bounce in shares of GE (and I’m not given the stock’s recent bounce, despite the relative out-performance), we would consider a short dated call calendar to limit premium at risk. With the stock at $31.50 you could sell the Dec 30th expiration 32 call at 18 cents and buy the Jan 20th 32 call for 42 cents, resulting in a 24 cent debit. On Dec 30th expiration if the stock is 32 or lower the Dec call would expire worthless and the you would own the 32 call for 24 cents. At that point you have a very cheap bullish earnings play on.