Shares of industry leader General Motors Company (GM) got sold in Wednesday's session, while its laggard peer Ford Motor Company (F) got bought. However, GM is likely to recover quickly and post new highs into year end. This mini-rotation was repeated across many sectors, with 2017's weaker performers getting a little love while broad market leadership, including big tech, got dumped to weekly and monthly lows.
However, we are headed into December and end-of-year mark-up season, when fund managers and Wall Street traders tidy up year-end portfolios in a effort to show customers that they own the top performers while positioning themselves for hefty bonuses. This is especially true in a raging bull market, when big-cap index funds can easily outperform stockpickers and asset allocators.
This long-observed seasonal tendency should strongly support GM stock, which has gained more than 25% so far this year while breaking out to an all-time high in the mid-$40s. GM's superior performance stands in contrast with that of Ford stock, which has risen a paltry 3.5%, lowering the odds that performance-conscious fund managers will hold the stock into year end. As a result, it makes perfect sense to use this GM decline as a buying opportunity. (See also: Stocks Will See 'Melt-Up' Into 2018 as Buyers Chase Profits.)
GM Long-Term Chart (2010 – 2017)
The company came public in November 2010 after the government's 2009 bailout was drawing to a close. It quickly generated a solid support base in the low $30s and took off in a strong uptrend that topped out at $39.48 at the start of 2011. The stock sold off into the fourth quarter, bottoming out in the upper teens and testing that level into the second half of 2012, carving a triple bottom reversal that attracted strong buying interest.
GM shares booked impressive gains into the end of 2013, lifting more than two points above the 2011 high and turning lower in a failed breakout that reinforced resistance near $40. Price action then morphed into a volatile expanding wedge, characterized by nominal lower highs and increasingly steep lower lows. This bearish pattern finally ended after the August 2015 mini flash crash dumped the stock to a two-year low in the mid-$20s.
Higher lows into second half of 2016 carved a symmetrical triangle with resistance at the lower highs trendline in place since December 2013. A December 2016 breakout failed to gather buying interest, generating more than five months of testing at new support, followed by a third quarter rally wave that reached multi-year resistance in October. The stock broke out immediately, lifting to an all-time high at $46.76 before easing into a trading range that is still in force as we head into December. (For more, see: David Einhorn's Greenpoint Cuts GM By One-Third: 13F.)
GM Short-Term Chart (2016 – 2017)
The 2016 trendline breakout stalled at the November 2015 swing high near $37, while price action into September 2017 completed an inverse head and shoulders pattern with a measured move target near $48. The rally into October nearly fulfilled that prediction before reversing into the 50-day exponential moving average (EMA), which has aligned with the larger-scale breakout level. The stock needs to hold range support at $41.35 because a violation would also signal a large-scale failed breakout.
This week's decline dropped the stock to a weekly low and into support at the 20-day simple moving average (SMA) near $43.30, while the 50-day EMA is now situated about 50 cents under that price level. This support zone should yield a higher low and a lower-risk buying opportunity, ahead of a strong recovery impulse that tests the fourth quarter high, possibly yielding a breakout into $50 by year end. (See also: 3 Electric Car Plays With 25% Upside.)
The Bottom Line
General Motors shares got sold this week in a counter-trend wave that lifted underperforming rival Ford. Traders should look for the primary trend to reassert itself in the coming days, with renewed buying pressure lifting GM into a test of the 2017 high. (For additional reading, check out: 3 Hot Stock Plays for the Holidays.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>