It
is the news of the century, I would say at least for the Dow Jones Index. If
you are living on the earth, you must know the last original Dow member has
finally been removed from the benchmark formed in 1896! It is General Electrics
(GE) which joined DOW 110 years ago. What could be worse than that for a
company that has been struggling for many years by now? After all, it tanked 45% in 2017 and
following the bombshell, it dropped to as low as $12.5 in off-hour trading, the
lowest point since 2009. Indeed for any long term shareholders, it has been a
heartbroken experience that seems never ending. But as a contrarian, I see the
picture a bit differently. You may recalled, a few months back I said we could still make some money from the dead money of GE. While the share price did not do much, I
indeed ended up making some good money from it with my unique dynamic hedged
trading as it slowly moved up to $15.5 at the recent peak (about 7% up-move after my post). Now with this last
straw crashing on it, I thought it would tank at least 5% or more with the
worst news it wanted to hear for now. Well, it only dropped about 0.5% on the
day. This by itself is a good contrary technical indicator suggesting the
multi-years of selloff is likely exhausted by now at least for a short term.
Another good technical strength for GE is its weekly momentum that is clearly
showing a positive divergence! The weekly chart is a longer term (months)
indicator that give traders a hint what the underlying stock will most likely
do in the next few months. While there is no question GE is still in a deep
crisis although this is not news anymore, the chance is high that it has
reached its important bottom by now and its next major move is upside, not
downside. Of course I’m not saying the absolute numeric bottom as it could
still struggle for a while at this level. But I think it probably won’t go
below $12 (it’s trading around $13 for now). How high can it go from here? You
probably have to use your imagination for that prediction. But let me give you
two recent examples that I did with such kind of crisis trading:
- Remember how scary for Macy last year? It appeared on the verge of bankruptcy due to the Amazon’s fierce competition that drove down its price to about $15 late last year. Clearly Macy was in a deep crisis but its technicals started to showed up strength when it reached to the bottom. Now it is trading around $40 within 6 months, more than doubled!
- Heard about Gamestop (GME)? A video and gaming retailer that is on the verge of being driven out of business by the online digital downloading services. I have seen many reports talking about the end of its business soon. But its technicals again showed good strength when it reached to $11ish just a few weeks ago. Then suddenly we saw the news that GME may be bought out by a private firm and its stock jumped to about $16 immediately. Not a big run for the stocks but my call options shot up by 200% instantly.
Don’t get me
wrong as if I’m talking about a fundamental turnaround for GE now. Not at all!
It is still deeply in debt ($60 billion)
that it needs to service in an increasing interest environment. It is not an
easy task to tackle (I will write more about the global debt crisis we will
likely face in the next few years). While GE’s new management is making all its
efforts to save the company, it won’t be easy and will take years to solve if
ever succeeded. The risk is still high for GE as a long term investing. Its next
big shoe to drop, if ever happens, is likely cutting or discontinuing its
dividend, for example. However, the thing you need to understand is that the
biggest money is often made, not when everything is going rosy and well but
when something really bad become “less bad”. The point I want to make here is,
while all the doomsayers and naysayers are telling you GE is close to its end
of world situation, its technicals are telling a different story, at least for
the next few months. That’s something I want to bet now for GE! Of course,
trading is a probability game with no certainty and I certainly could be wrong.
As always, be mindful of the downside risk for trading!
By the way, let me take
this opportunity to clarify something about dividend reinvestment (DRIP). I got
a laughable comment from a naysayer that I should include GE for my DRIP as I
have been saying that lower prices are good for the long term total return for
DRIP. What a stupidest question of the year in my book! 😜😜 Of course this is more
joking than anything else but apparently such kind of comment could only mean the ignorance about the DRIP! I know DRIP is not something most of people can
easily understand, especially the critical criteria that must be met for a
successful DRIP. While technically one can include all the dividend paying
stocks for DRIP, the essence of a successful DRIP requires some very stringent
inclusion criteria. Briefly, we want a dividend stock that is fundamentally
solid with sufficient cash flow that can pay not only just stable dividends but
increasing dividends over
years. I’m personally even only interested in those stocks with very long
history (at least over 10 years) of paying dividends without interruption and
increasing dividends at an annual rate of 10% or more on a solid business fundamental. With this prerequisite
in hand, you really don’t want to see the share price to move up too much. The
share price going up may make you (also me) feel great but actually in the long
run, it hurts you/me for the total return at the end. The most ideal scenario
is that a stock is not moving much or even moving down while its dividend is
keeping going up. If that happens, your tiny investment can easily become a multi
million dollar asset over a long period of time. Of course we can rarely see
such an ideal situation as good companies often move up with their dividend
appreciation. But at least we don’t need to worry about its short term or even
sustained longer term share price declines, like we have seen during 2008-2009
or long term bear market during 1960-1970. Don’t forget MSFT had been dead
money for a decade while still kept increasing its dividends 15% annually before
recently. I think we will likely move into such a long term bear market in the
next 5-10 years due to enormous debt crisis brewing at the moment globally over
years. It is not a question of if but when the bomb will explode. In such kind
of end of world situation, DRIP will be one of the two best strategies to
safeguard and yield reliable income to you. Don’t be fooled by those seemingly
financial gurus telling you to chase high growth stocks for your long term
investment. I’m not against it but I will tell you later why DRIP is much
better and practical for most of people (99%+) to safely grow your wealth unless
you are a genius to be able to identify such high growth stocks and can stay
along with them from the beginning.
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