If you were riding the mid-year bull rally in General Motors Company (NYSE:GM) stock, it’s time to reconsider your position. Not only is GM’s stock price down 10% since its October peak, but sales continue to fall and investor sentiment is worsening. It all adds up to a bearish outlook for one of America’s biggest automakers.
Starting off with the technical picture, GM stock price is nearing the completion of an inverted head-and-shoulders formation. The stock’s peak in October near $46 rolled over into a bottom near $41 in early November. The shares peaked once again last week near $45, only to meet with rejection and head sharply lower.
GM is now clinging to support in the $40-$41 region, and a breach of this area could send the stock down to $39 in short order — potentially leading to a retest of its 200-day moving average near $36.50 if the broader market hits a weak spot (say if the Republican tax plan stalls on Capitol Hill).
Underpinning this weak technical outlook is a worsening sentiment backdrop. General Motors has taken considerable flack in the financial media lately.
First, November auto sales declined 2.9% on the heels of another year-over-year decline in October. Then, yesterday, GM was targeted by the National Safety Council (NSC) after it unveiled in-car Marketplace application — which allows drivers and passengers to order food right from their vehicles.
Per NSC President Deborah Hersman, “There’s nothing about this that’s safe … If this is why they want Wi-Fi in the car, we’re going to see fatality numbers go up even higher than they are now.”
The negativity in the mainstream financial media dovetails with similar pessimism among Wall Street analysts. According to Thomson/First Call, GM stock has attracted 15 “hold” or worse ratings out of 25 total. The 12-month price target currently rests at $47.31, a roughly 12% premium to GM’s current perch. Despite the negative outlook, there is still room for downgrades as well as price target cuts, especially with monthly auto sales continuing to falter.
Turning to GM options, we find that speculative traders are betting heavily against the automaker. Currently, the January 2018 put/call open interest ratio weighs in at a lofty 1.45 — a near-term peak for GM negativity.
While quite a bit of these puts are at deep out of the money strikes, there is considerable put accumulation at both the $42 and $37 strikes. In other words, GM options traders are preparing for a potentially sharp drop in the stock.
Overall, January 2018 implieds for GM stock are pricing in a potential move of more than 6% for the shares through expiration. This places the upper bound near $44.50 and the lower bound at about $39.
Put Spread: With GM on the verge of completing a bearish head-and-shoulders pattern, and sentiment lining up against the shares, it’s time to bet against GM stock. Traders looking to join the growing bearish contingent might want to consider a Jan 2018 $40/$41 bear put spread.
At last check, this spread was offered at 22 cents, or $22 per pair of contracts. Break even lies at $40.78, while a maximum profit of 78 cents, or $78 per pair of contracts, is possible if GM stock closes at or below $40 when Jan 2018 options expire.
Put Sell: If you are looking for a more conservative play, then a Jan 2018 $35 put sell may be more your speed.
At last check, this put was bid at 10 cents, or $10 per contract. The upside to this put sell strategy is that you keep the premium as long as GM stock closes above $35 when Jan 2018 options expire. The downside is that should GM trade below $35 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $35 per share — which is arguably a solid price at which to buy GM from a long-term perspective.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.