Sean Hyman
Contributing Writer
instructor@mywealth.com
Here in America, for some reason we are caught up on the notion of being "too big to fail". I'm not sure why..because history doesn't show that big companies are "too big to fail". Many fail on their own and many have never gotten bailouts either.
For instance, GE (General Electric) is the only original "big" company left of the Dow Jones Industrial Average.
If companies are too big to fail...where did all of the investment banks go? Surely, they were too big to fail on their own and also too big to be "allowed" to fail right? Wrong!
While it appears that GM, Ford and Chrysler will get their bailout, there are some simple "warning signs" that should have told an investor long ago not to keep holding GM and certainly not to buy more of it.
Take a look at the long term chart of GM below. This chart dates back to 1970 but the years that we will focus on are the 90's through today.
GM's Chart Spoke Volumes to Those Who Were Listening!
Several things are worth noting just from the price action on the chart alone. In 1999 and 2000, the price of GM's stock just went parabolic (1st warning sign). Parabolic moves are unsustainable longer term. Many times they will indicate a top in the stock for many years to come.
Next, the green uptrend line broke which is the 2nd warning sign. This break was then confirmed by the start of the downtrend (3rd warning sign). The 4th and final warning sign was seeing how the volume picked up and expanded as the downtrend gained strength. That's a horrible sign because it shows that the trend is likely to continue.
So before you know technical analysis and all of the "neat" indicators, just looking at a long term price chart can show a ton. It can give you warning signs long before an analyst is going to alert you to it. I've seen them issue buy recommendations near the top and only give a sell recommendation when it gets into the single digits. Who needs that?
Let the "supply and demand" that shows up on the chart become one of the tools that you use to inspect the health of a company. Long before you can read a balance sheet, you can read the chart and see if the buyers are in charge or if the sellers are in charge.
I've used this simple approach not only to individual stocks but also to the major stock indices. I encouraged a close relative of mine to take their 401k into cash for the moment (since they were a year away from retirement) because the markets looked extended from the price charts while the fundamentals of the U.S. were starting to erode.
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