See previous blog. This was not supposed to happen according to the experts, but here we are with a new high of $23.44, well above the previous one of $22.970. So what went wrong? Perhaps the 5 wave down sequence was preceded by a small a and irregular b making the 5 waves the c. Perhaps the present climb will prove to be an irregular b-wave. It is all splitting hairs and simple put EW does not work always. Particularly not in real time.
All the big stocks like Walmart, Exxon, IBM etc. have outperformed the index this year, GE included. Earlier (see blogs) we advanced the notion that GE might actually be so much out of phase with the market overall that it is, perhaps, in a new bull market. After all $5 or so seems low enough. Here is the chart again;
At $23 GE will have retraced 1/2 of the recent drop from $42 (it was once at $60!). The problem with the bull case is that there is no impulse wave up at all, although, I guess, you could stretch things a little and argue that we are presently in a wave 3 or even 5 of a first impulse wave. Not very convincing. A much better interpretation by far would be that the entire move from the low is actually “corrective”, that is counter-trend. The pattern would be an A-B-C with the B as an expanding triangle, treading water for 2 whole years. If the C is to be vector equal with the A, a very common event, it should unfold in 5 waves and end on the circle where it is now. Some are inclined to call the moves from b on the jaws of death. As noted elsewhere this pattern does not exist in EW-land and it has a little too dramatic ring to it. Here at least, it may be conveying the right message.
EW contains a lot of ambiguities which is why 2/3 of the time you are really not sure at all what might happen. To put it in other words, sometime the light is green, sometimes it is red and most of the time it is yellow. Two stocks that have nothing much in common are green for the next few years (but not necessarily months). Gen. Electric and Morgan Stanley both have very articulate A-B-C corrections which are somewhat stylized in the charts below. By the way, these charts do not show the intra-day or week lows, for instance GE actually did get below $6).
Unfortunately I cannot get them on the exact same time-frames, unless I put them together in one single chart;
Both these patterns would strongly suggest that these stocks are back on their way up in a new bull market. MS has already retraced 50%of the first wave up, whereas GE may have a little more to drop in what is presumable a wave 2. In both cases a retest of the lows cannot be excluded completely but the odds are better that you will win with these stocks than with, for instance a Pepsi;
This one is bright red. Should it make a similar A-B-C as the others a target of about $40, where wave 4 of previous degree resides , would fit the picture. That is down some $30 from where we are now and there is only $10 to the upside until you hit the upper trend-line. There is nothing particularly wrong with the stock. It has a P/E of 17 and yields about 3% .
Just some rough stats; Cap. P/E Yield
General Electric 206 bln. 16.6 2.91%
Siemens 110 20.54 2.89
Philips 30 17.5 3.26
Supposing you wanted to buy one of these what would be the best choice? all three yield about the same percentage, Philips having a slight advantage. From a P/E perspective General Electric would be the winner by a fairly wide margin. If you like heavy industry Siemens might be your choice but the GE is well represented in that area as well. Medical equipment is made by all three. Lets look at the charts.
The charts do not have the same time frame. Interestingly, when GE was still close to its highs Siemens was closer to its lows. This was when Jack W was superman and the guys at Siemens were ridiculed for their arterial sclerosis. One had 6-sigma managerial expertise envied by all and the other was viewed as a make-work project. After almost blowing up while trying its managerial skills on “banking” GE dropped 91% to just under $6. Siemens only lost 72% by dropping to a still respectable $45. So much for owning “blue-chips” at the wrong time.
Philips , now Royal Philips is the baby of the three. It is best known for its lighting/glow-lamp division as its full name indicates. Interestingly, it is the only company of this size that uses replacement-cost accounting. Just to avoid the inevitable confusion, it also reports using the traditional historic cost method. As an aside it is somewhat ironic that the FASB in the US has been arguing in favor of mark-to-market accounting – arguable a form of replacement cost accounting but for valuation rather than depreciation purposes – precisely where it is inappropriate, i.e. traditional banking. The chart for Philips resembles that of GE the most and at the low of the C leg it loses72%, the same as Siemens. Presently it is right in the middle of the range and for that reason alone should not be bought! Given the respective positions of the other two within their range of the last 10 years, GE should be bought and Siemens sold at a 6 to 1 ratio. See the chart on the left , below;
This is not the best pairs trade chart but it will do. Each stock is given the same starting point and the charts simple shows how far the stock is deviation from that starting point in a percentage. The lower chart shows those two percentages added together. A few weeks ago we were at the widest point in the past ten years (and probable also over a much longer time-frame). This trade would be based on this gap narrowing as in 02 and 08. A drop by SI to about $90 and a rise for GE to $25 , both fairly reasonable assumptions, would close the gap to about 65% from the present 135% , a gain of 70% on the notional investment. Observe that at the end of 2007 the gap was almost as wide as it is today. It took less than a full year to narrow to almost nothing. This is , of course , market neutral as the market’s direction is not relevant to the outcome. The chart on the right does the same for SI and PHG. Clearly the higher degree of correlation makes that spread (now at +60%) a lot less robust.For GE and PHG the equivalent number is –60%.