As Alice from Lewis Carroll's Alice In Wonderland pondered "Well! I've often seen a cat without a grin, but a grin without a cat! It's the most curious thing I ever saw in my life."
General Electric (NYSE:GE) is fitting for both scenarios:
First, it is a cat without a grin because there is nothing unusual about a cat without a grin just as there is nothing unusual about General Electric. It is a heavily capitalized, widely held, institutional interest of 54 percent and additional fundamental statistics which are consistent with any lumbering giant; and
Second, it is a grin without a cat because it is "curious" that such large blocks do not impact this issue as profoundly as would seem reasonable when using other issues as a measure.
That said, the blocks included below are a small subset of a massive General Electric file. Nevertheless, these are by far the most significant.
The last time I shorted GE was at $20.24. I exited the trade seventeen days later at 18.88 for a tidy little profit of 6.7%. The block in the matrix on March 16 was the set up. I believe the blocks on June 7 and June 8 are very similar in nature and will perform the same function as the block on March 16. This was obviously not an earth shattering trade. The only reason for bringing it up is to offer a real life example of what I did, the reasons I did it and why I believe the same trade is about to happen again.
I do not typically look at indicators, but in this case I will make an exception for the Stochastic. It seems to indicate that General Electric is primed for a reversal. As you may or may not know, the Stochastic is a more accurate predictor of price action when a stock is range bound. This is certainly the case with General Electric.
The Stochastic Oscillator was developed by George C. Lane in the late 1950's; it is a momentum indicator that shows the location of the current close relative to the high/low range over a set number of periods. Closing levels that are consistently near the top of the range indicate accumulation (buying pressure) and those near the bottom of the range indicate distribution (selling pressure).
Important Note: When I refer to accumulation and distribution I am always referring to the Designated Market Makers accumulation and distribution. Mr. Lane's focus is on the public buying pressure and the public selling pressure. Essentially we are saying the same thing, albeit from a slightly different paradigm. The Stochastic is an overbought and oversold indicator. I am in no way attempting to dispute Mr. Lane. I believe and thus acknowledge that he is technically correct. Where we part company is he assumes that the public is driving the price up or down, based on their buying and selling pressure; I always put the emphasis on the Designated Market Makers side of the trade. Believing that the public is in control is a bit like believing that the tail is wagging the dog.
That said; I suspect this time may not be as peculiar with regard to the extent of the decline I expect to see in General Electric. I believe there is a high probability that it will decline more than it did the last time blocks of this magnitude traded. It could easily reach $16.00 or $15.50 and that will not be "curious" at all. It will be "a cat without a grin as opposed to a grin without a cat".
On the Basis of the foregoing these are my views and observations:
I recommend establishing a short position in General Electric. Open your position with only 1/4 of whatever capital you intend to commit to General Electric at $20.33. Purchase the remaining 3/4 of the position at $21.96 and stop out at $22.82. Do not post your stop out. I have said it before but it is so important that at the risk of being redundant and in an abundance of caution I will say it again. It is too easy for the Designated Market Maker to cash investors out by moving the price above or below your stop out and move the price right back down or up again. In addition, when a stop out is triggered it converts into a market order and that could be disastrous if the Designated Market Maker decides to really take advantage. Remember the "Flash Crash"? I would be looking to exit the trade at a downside price target of $17.94. Do not allow this position to exceed 5% of your overall portfolio. I would seriously consider re-establishing a long position at or near $16.00 and apply the same rules for position sizing. You could also sell some near close to expiration puts in the hopes of having the stock put to you. If it is put to you, then the premium will bring the cost basis down and if not then the premium is money in your pocket.
There is always the possibility that the trade may not work out.
There Is Never A Sure Thing (particularly on a short)
Investors must realize and recognize that there is never a sure thing. Sometimes events that have a low probability of occurring bring forth very serious consequences should they come into being. Investors must judiciously consider what the inherent practical limits are and how much they stand to gain in relation to the risks involved in establishing any position.
In addition, persistence can become desperate folly by allowing a losing position to become a viable argument for deciding on a new position. Rather, such decisions should be based on the current and soon-to-be circumstances.
Any position in which one unexpected factor has a significant impact on your portfolio is the result of poor planning. It is a fault most commonly associated with people who want to explain away their losses. SUN TZU -Art of War "Use an attack to exploit a victory, never use an attack to rescue a defeat."
If you follow the process recommended and the trade does not work, the overall loss in this model is $3,000.00. That amounts to .003 of the overall portfolio (theoretically valued at $1,000,000).
And finally, never be a brave and brainless investor because a fool and his money are soon parted.
A portfolio of $1,000,000 should position size in the following manner.
This is a trade, not an investment. Be ever vigilant.
That's it for now…. Have a nice day.