What's Next for the Biggest Underdog on the Dow – Schaeffers Research (blog)

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With three full quarters of 2017 now in the books, General Electric (NYSE:GE) has cemented its standing as the worst-performing Dow component (by several orders of magnitude). At Friday’s close, GE was sitting on a year-to-date decline of 23.5%, even as the broader Dow Jones Industrial Average (DJIA) has gained upwards of 13% since the calendar turned to 2017. (GE’s closest competition for biggest Dow laggard is IBM, for the record — and Big Blue is down a comparatively modest 12.7% year-to-date.)

GE bounced after bottoming out in early September at a two-year low of $23.58 — but unfortunately for the blue-chip conglomerate, the ensuing rally was thwarted rather neatly by its 50-day moving average, in collaboration with a significant round-number percentage return that could continue to keep GE under pressure going forward.

Specifically, we’re referring to $25.28 — a price point that might not seem particularly “round” on its face, until you consider that it represents an even 20% loss from GE’s year-end 2016 close at $31.60. The $25.28/20% YTD loss area was breached on an intraday basis for the first time in 2017 on July 21, as GE gapped lower on earnings. The shares recovered considerably from their $25.26 session nadir, but found intraday resistance at the site of their pre-gap lows near $26. Following that negative earnings reaction, GE traded sideways until it tested the site of its post-earnings lows again on Aug. 10, trading as low as $25.27 before ending the session at $25.30. The very next day, it became clear this latest test was a failure, as GE promptly sliced through the 20% YTD loss level and embarked on a rapid path down to the aforementioned two-year low.

Then, consider also that GE’s September high point, on an intraday basis, was set on the first day of the month, and registered dead even with the Aug. 10 closing price of $25.30 — and that the stock quickly pulled back from that peak to end the Sept. 1 session back below its negative 20% year-to-date level. From there, despite the aforementioned “dead cat recovery” from the $23.58 low point, GE was able to climb no higher than $25.21 at its late-September high point — a handful of pennies below its 20% year-to-date loss level.

In response to GE’s abysmal price action, the stock’s options have gotten more expensive for premium buyers. Just last week, in fact, 30-day at-the-money implied volatility (IV) on GE options hit a new 52-week high of 21.3%, per Trade-Alert.

Interestingly, however, GE puts are not particularly overpriced relative to their call counterparts. Trade-Alert calculates the 30-day IV skew at only 14.2%, in the 42nd annual percentile — suggesting GE put options are baking in a slightly lower volatility premium than normal, compared to calls (specifically, 21.73% for the put, versus 18.85% for the calls). So, despite the equity’s emphatic underperformance on the charts, bearish option bets are pricing in a “barely there” premium over bullish options.

Finally, in the most recent short interest reporting period, GE arrived fourth on the list of stocks with the biggest dollar value changes in short interest. Short interest rose by nearly 23% over that two-week period, with the dollar value of that increase exceeding $640 million. However, short interest currently only represents 1.4% of GE’s float — and has plenty of room to keep rising before it approaches the highs of late 2015. With this deep-pocketed bearish contingent piling into bets against GE while a key round-number resistance level lies directly overhead — and with GE options showing a distinct lack of any “panic premium” on the put side — we’re betting on more pain ahead for the shares.

ge daily 20pct ytd

Subscribers to Bernie Schaeffer’s Chart of the Week received this commentary on Sunday, October 1.

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