Why The Risk-Reward Ratio Appears Unfavorable For General Electric

| About: General Electric (GE)

General Electric Company (NYSE:GE) shares are showing signs of having topped out, even as the major indexes have surged to new highs. It appears that GE and other stocks are signaling a potential market correction and an economic slowdown in the next couple of quarters. While the stock market has done an impressive job of ignoring bad news, it certainly seems ready to at least pause, if not pull back, in a correction soon. The S&P 500 Index (NYSEARCA:SPY) has surged about 15% in 2012, and it added another 9% gain in just the first three months of this year. The stock market seems due for a pullback and General Electric could be leading the way lower for a number of reasons:

1. Many investors view General Electric as a proxy for the global economy. This is because it sells its products and financial services around the world. It is also because the types of products and financial services it sells are often highly dependent on the strength of the economy. For example, it manufactures industrial products like locomotives and jet engines. It also has a significant financial services division called GE Capital.

These types of goods and services do well in a booming global economy, however, despite a recent bout of solid data in the U.S. housing market, there are significant signs of economic weakness in many parts of the world. For example, many parts of Europe are experiencing recession-like conditions and those conditions appear likely to last for awhile. China is also seeing some signs of a slowdown and the stock market in Shanghai has dropped significantly. There are also concerns that China has a real estate bubble that could burst in the future which would only add to global woes. Plus, there are also indications that the United States is about to slow down as well.

2. There has been some positive housing data in the United States, but we have seen this before in the spring, only to see it fizzle. The positive housing data is so limited in nature that it is too early to believe that it is sustainable, especially with major headwinds that only recently developed in the United States. For example, the payroll tax hike was implemented in January and that could drag consumer spending down. A budget sequester by the U.S. Government was implemented just weeks ago and the full effects of those cuts could still be trickling down. These cuts impact a wide range of industries and even involve employee layoffs. A number of major U.S. companies have recently reported disappointing earnings. This includes bellwether firms like Federal Express (NYSE:FDX), Oracle (ORCL) and Caterpillar (NYSE:CAT). Those companies are in different industries and have global exposure, just like GE. Earnings misses and weak guidance are indicating that problems could lay ahead in Q2.

3. The economic problems in Europe are causing weakness in the Euro currency. It recently dropped further as a result of the banking crisis in Cyprus. In addition, Japan's Prime Minister Shinzo Abe has set forth policies that have drastically devalued the Japanese Yen. That currency has dropped by about 8%, just recently. This and the drop in the Euro could lead to reduced revenues and profits for GE because companies based in Japan and Europe are going to be more competitive as global exporters. Just look at the recent surge in Japanese equities and you can see that investors are betting on a weak Yen to help that country and hurt other global exporters. A dollar that is strong versus other major currencies like the Yen and the Euro can also result in negative foreign currency translations with cash held outside the United States. Exchange rates could become a major issue for GE in the coming quarters.

With so many negative headwinds, and with GE shares appearing to be topped-out, cautious and forward-thinking investors might want to take profits now. The upside seems limited, but the downside could be back to around $21, which is right around the 200-day moving average. Many investors like GE for the dividend which yields about 3%, however, with an annual payout of 76 cents per share, investors could lose over two years worth of dividend payments, if the stock sinks back from $23 to the 200-day moving average level of $21, which it might in a market correction. That is another reason why the risk to reward ratio appears unfavorable at this time.

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.