General Motors Fires 27,000 People, Stock Jumps by 5%
By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets
In early November, we commented on GM, arguing that the stock may reach $40. Not much time has passed, and yet many key events occurred, which increased the volatility in General Motors’ stock. Currently, any major rise is unlikely, as Donald Trump is now taking part in this.
Until recently, things were quite in line with the technical analysis, with the stock correcting to $33.80 and then going up to reach $40.
See the prediction chart we made on Nov 2, below:
On Nov 26, however, GM announced its cost reduction campaign that included firing up to 15% of the employees and around 25% of the management, as well as closing the factories in Michigan, Maryland, and Ohio in the US, and Ontario, Canada.
This was very bad news for the families of the fired employees, but the investors liked it, which pushed the stock up by 5% within a single trading session.
This job cut is of course not in line with Trump’s policy; while the US president is trying to bring the manufacturing back to the US by cutting the tax rates, GM is closing the US based factories, while still maintaining those in Mexico and China. Trump finally said the US government might cut off the tax exemptions for GM,
And this can be well understood. This is not only about the job cut. In 2009, the US government paid $30B just to save the company, which then went public right after bankruptcy. Now, 9 years later, GM is closing its US based factories, but still maintains those in Mexico, where the local government also took part in rescuing the company.
GM reacted on the president’s words with a comment that the trade wars led by Trump made the steel and aluminum import more expensive, which meant the exported GM products were no longer as competitive as before. The major reason lies, however, in bad sales of automobiles. The Q3 earnings report was good, but not because sales were high; rather, it was because car prices went up.
By cutting production, GM is going to save up around $6B, thus doubling its investment into electric car development, including driverless ones.
The only company that wants to increase the manufacturing capacity in the US is Tesla, and, for it, the GM news is very good, as the company may buy the factories being closed and start producing Tesla cars there. This made the Tesla stock rise by over 1%. It would rise much higher in case the decision by GM was final, but it is not.
GM may still keep the US based factories, closing only those in South Korea next year. However, it remains to be seen whether economic and social pressure will get GM to reverse its decision or prolong its factories in North America.
If this is the case, it will be a win-win, as investors will get a higher stock price, the government will keep the jobs, and GM will get additional privileges.
However, GM may still close the US factories, and in this case, nothing may be predicted for sure. Trump’s policy is well unpredictable anyway, and his threats on GM losing its tax exemption privileges may come true. GM will anyways get the positive effect of the factories closing in the short term, but, in a longer term, the company’s activities in the US may suffer a lot. In this case, everything will depend on the factories in the rest of the world, where GM has better conditions.
Thus, fundamentally, the outlook is uncertain and somewhat negative. Let’s see what we can do here with some tech analysis.
Support and resistance levels are key here. The resistance at $37 formed after the earnings report and was active for around a month. Over this time, a key support appeared at $34, then other support levels formed at $35 and $36, which finally broke out the resistance at $37.
It was first broken out when the job cut news came in, but then Trump’s criticism made the price correct; still, it was soon back near $37.
Thus, the report led to a high demand for GM shares, which was followed by a consolidation, as all positions had been taken and the market needed new buyers. Nobody wanted to buy at $37, though, so the price pulled back to $34, where it actually had been before the report came out.
This motivated investors to buy at this good price, and the stock went up quickly.
While the price was going up, new support levels were being formed, which could signal an uptrend. A new support was formed at around $35, which means the investors were no longer expecting any major pullbacks.
When the news on GM job cut came out, new buyers jumped in, which pushed the stock over $38. Those who were late to buy were waiting for a pullback to buy at a better price, which formed another support at $36. The price then went up to $37, where it is currently now.
All this means is that investors have been adding long positions in GM over the last two months, the short float is very low, just 1.99%.
A large amount of longs has a drawback: in case most investors decide to quit, this will lead to a sharp decline. Thus, it is important to find the expected exit point.
In order to find it, one should determine when the stock became popular. This can be easily found at the moment when the earnings report came in.
This particular price level, $33, is a good stop loss; right here, the investors may stop expecting the price to rise and start closing their positions.
Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets shall not be held liable for the results of the trades arising from relying upon trading recommendations and reviews contained herein.