Behavioral Autos: $F $GM

[signinlocker id=675]For the past few weeks interest in the big auto companies ($F, $GM) has picked up. The narrative is simple and, I believe, will persist.

1.  Global growth is good.

2. We are past the ‘peak auto’ obsession.

3. Natural FOMO favorites at this juncture. At 6-7 PEs and high dividend yields, it is one of the only sectors to offer both beta and some sense of value protection. For skeptics who have been light beta or ppl who have to buy because of inflows, this the downside protection provides enormous psychological comfort.

4. Free option on getting lucky with innovation. GM and F have shown signs of life on the innovation front. We don’t know how successful they will be, but we do know they are not priced for it. And some 2nd mouse is likely to get TSLA’s cheese.

Here are the charts:

Ford over the past five years
GM over the past five years

Ford is breaking out from a low base and looks poised to run. GM has already had a primary breakout and appears to be consolidating in preparation for a leg higher.

This is how you can play them if you are not already involved:

Ford over the past year
GM over the past year

Because short term both names–especially F–are a bit stretched, ideally you’d want to see a low volume pullback into the areas indicated by the red circles. The way a pullback happens in terms of both volume and pattern matter. You want the pattern to look like it’s quietly wedging back. But given the longer term patterns, the odds of a pullback into the red circles being a good one are pretty high. If they drift back into the red circles, you could buy a full position with stops on a close somewhere below the bottom of the consolidation structure in GM, and somewhere not too far below the breakout in F.

(NB: The distance of the stops from the entry point is important in considering the absolute size of the position.)

If, however, GM doesn’t pullback and starts to break out, you can still buy it but no more than a half position, and the stop would have to be higher, somewhere not too far below the breakout point from the consolidation pattern (eg ~43.5).

For Ford it would be a little bit harder to buy a continuation with no pullback because the natural stop is further away than is the case with GM and it doesn’t have a secondary consolidation pattern to emerge from. But in theory it could still be bought if it continues, just in much smaller size.[/signinlocker]

Good luck and happy driving.