General Electric Fizzles: Market to Retest Lows?

General Electric (GE) reported earnings this morning, missing analysts estimates by 7 cents (44 v. 51 estimate). While an estimate miss is never great, lowering yearly estimates can be a sign of slower times. In this case, with GE being the 4th largest, multi-faceted company, any reduction in estimates can be described as a general weakening of the economy. With their miss and revised forecast, analysts are now confirming that the US is in a recession [click charts to enlarge].

GE’s drop this afternoon was the largest it had ever seen since the crash of 1987. But what’s even more shocking isn’t necessarily the price drop but the volume. On average, GE trades around 60 million shares per day. Today? 366.1 million. How many shares were traded on the NYSE at the end of the day today? 1.26 billion shares. 25% of all share transactions involved GE today (thanks to the Shadowtrader for pointing this out). This miss is not to be taken lightly.

Over on the Option Addict, some traders were signaling GE as the company to watch in order to push the markets higher, and with good reason. Here’s a graph of GE again; however, notice the blue line overlaying the black. The blue line is the Dow ($INDU on Prophet charts). Note the similar movements by both lines. Time and time again, the Dow will eventually diverge on GE. In this case, if the same situation were to hold true, it would be expected that the Dow has at least another 300-400 points of downside before settling down. With the good correlation between the two, it’s not unlikely to see a retest of recent lows.

Need another potential reason to see that the bottom has yet to form in the markets? Take a look at the VIX over the past year. Notice the upward trending line. You should see approximately 4 retests of that line over the past year. In each case, the VIX has managed to test the 30-32 levels before retesting that trending line. If the same pattern hold true this time around, today’s bounce off that line could signal a bullish (and therefore potentially bearish) move in the VIX back to the 30-32 level near the end of May.

Does all of this information mean we’re headed back down to the lows of January? Of course not. Any number of items can occur at any time. These markets are very news driven right now so it’s almost impossible to predict what’s going on. I will say that I don’t believe we’ve seen the bottom just yet. I’d like to see that retest of the January lows first.