Is This The End Of An Era For GM?

08/04/08 03:29:27 PM

by Koos van der Merwe

GM losses reach US$15.5 billion – is this the end of the American automaker?

Security: GM
Position: Sell

Do GM's massive losses mean the end of the automaker? Money-losing lease agreements, sputtering auto sales, and a costly effort to turn its business around have caused the third worst loss in GM's 100-year history. Thousands of workers have been laid off, with factories closed as the company sheds assets to cope with a steep downturn in customer demand. In the past, GM's chart was parallel with that of the Dow Jones Industrial Average (DJIA). Is the present chart of GM telling us something?

FIGURE 1: GM, DJIA, MONTHLY

Graphic provided by: MetaStock.

Figure 1 is a monthly chart of General Motors superimposed on a monthly chart of the DJIA. Note how the two moved in tandem until January 2004, when as the DJIA continued to rise, GM fell away. GM is still one of the companies that make up the DJIA, and its fall must have weighed on the DJIA's performance. What is interesting to note on the chart is that in spite of GM's fall, when GM corrected, the DJIA corrected and its high in October 2007 was also a high in GM's price as it continued to fall.

FIGURE 2: GM, DAILY

Graphic provided by: AdvancedGET.

Figure 2, a daily chart of General Motors, is interesting because it shows the inexorable fall in the price. Even though the relative strength index (RSI) gave buy signals, GM reacted to them but never followed through, especially from April 2008. One can ask whether the recent buy signal of July 2008 is effective or a failure.

Has GM bottomed? Obviously, the answer depends on the trend of the DJIA. If the DJIA has bottomed and will now start moving up, a sign that the US economy is recovering, then GM will start recovering. Otherwise, as the chart suggests, as the DJIA falls, so will GM, but far, far faster.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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Is This The End Of An Era For GM?

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