The market has hopefully come to its senses. Investors are beginning to realize that it does not make sense to let go of a formidable, profit-making automobile business while the broader market valuations remain rich. General Motors (NYSE: GM) has finally staged a powerful breakout from its multi-year downtrend in yesterday's session backed by strong volume. A lot of short-sellers would have been burnt.
On November 26, I wrote an analytical piece on GM in which I said that beyond $35, there should be a push to $38. At that time, the stock was trading closer to $34.25. Yesterday, it touched a new 52-week high of $36.66 and closed the session near the highs at $36.43. That is a remarkable display of the underlying bullish strength.
The media is giving all the credit to the record November sales, but investors are advised to cut through the fluff to realize that it was just a price action that was long overdue for GM. While the broader market was perched near all-time highs, automobile stocks such as GM were languishing in a narrowing range due to unwarranted, unsubstantiated concerns over peak auto and a recession. Investors are now able to see that GM is a much stronger company than they thought and which rewards the investors generously via a strong dividend payout and share repurchases. Hopefully, the market remains rational and the stock sees $38 in the near-term.
So, what should one expect from GM given that the multi-year range has been breached? Well, one has to look no further than the daily GM price chart below.
The mighty breakout witnessed yesterday probably crushed a lot of shorts, at least the weak hands. Strong participation from the investors was recorded in the volume which was almost twice the 20-day average. The 14-day MFI reading appreciated to 70.2509, corroborating the bullish undertone in the stock.
The 30-day, the 50-day and the 200-day SMAs are well below the current market price, meaning there is strong support on the downside. Historically, whenever the stock has deviated too significantly from these moving averages, it has pulled back slightly to let the averages catch up. This time should be no different.
Even with all the intermittent dips that will come along the way, the stock should do just fine to reach $38, and maybe even higher.
But, Here Is The Tricky Part
The strengthening U.S. dollar (NYSEARCA: UUP) is painful for a lot of U.S. companies. If the dollar continues to strengthen, it will adversely affect GM's profit as the Canadian dollar weakens. GM Canada sales are up 2 percent YTD.
This presents a dilemma before the management: should they raise prices on some vehicles or should they cut back on the rising incentives? Either way, they risk a step-down in sales. And knowing that the market can remain detached from strong, cheap automobile companies for a long time, the management may even be compelled to take the hit (by rising dollar), and let the things the way they are.
If the management decides to raise the prices, it should be seen as positive by the market. The increment can be minimal or small at first, to tackle the weakening CAD and not disturb the sales trend. But, we will just have to wait for the decisions.
General Motors investors do not have to rush to book profits even as the stock reached a fresh 52-week high yesterday. Technical analysis indicates that there is a strong possibility of the stock touching $38 in the near-term.
The run-up to $38 will not be a straight line; there will be intermittent dips which will test the investors. But, the heavy volume witnessed yesterday supports the bullish case for GM. We can expect further short-covering in the coming sessions.
Like always, support from the broader market will be helpful to reach the target price sooner.
This rally might not die anytime soon, so sit back and enjoy!
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Disclosure: I/we 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.