The stock indexes in China have been bright green since February, which is a bad thing. In China, a down day is shown as green on Chinese tickers and red is positive. The green has only gotten worse since U.S. exchanges went into the “red” at the beginning of October. Normally, it isn’t a good idea to equate a stock index with the economy. They are usually correlated, but not always.
In this case, however, the performance of Chinese stock indexes and indicators for the Chinese economy are aligned. The People’s Bank of China (PBOC) recently lowered the bank reserve requirements again (similar to a rate cut) to try and stimulate consumption and lending, which is usually a bad sign.
In addition to slowing consumer demand in China, most domestic firms are dealing with increased pressure from the “trade war” with the U.S., which has lowered expected export performance this fall. One of the most important casualties of the trade war (from the U.S. perspective) are car companies looking for growth in the world’s largest auto market — which includes General Motors Company (NYSE:GM).
Ford Motor Company (NYSE:F) has already announced layoffs, and we know that profitability growth is expected to remain low in emerging markets — especially China. GM is not as well capitalized as some of its peers, and we think it is weaker from a technical perspective as well. As you can see in the following chart, GM broke the recent lows near $34.50 that had established short-term support. The next level where we might expect buyers to step in is in the $28-$30 range.
We feel that worsening export performance, slowing consumer spending in China, a cyclical slowdown in auto-sales in the U.S. and rising costs will continue working against GM this year. A short position should provide a great opportunity to profit and provide a little diversification as the stock drops and the major indexes are choppy. As the stock moves lower, there are some income opportunities as well if we decide to sell short puts against the position. However, for now, we think an outright short position is the best way to initiate the trade.
‘Sell to open’ (Short) General Motors Company (GM) Common Stock for a minimum price of $32.75.
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