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Traders of GM and other auto stocks must think like actuaries

Despite being listed on the Billionaire Hedge Fund Index, the weekly chart of General Motors (NYSE: GM) stock now confirms its bearish bias along with the general market. It is temporary, of course, but the critical question centers on determining the best method as to when and how to act as a buyer again.

Aside from IRS tax deadline, the “Sell in May and go away” stock market mantra is being repeated again, especially now that the general market has taken a hit; and is now considered by some guests on CNBC as overbought. As they say in Chicago, it’s about ‘da bulls’ and ‘da bears.’

Last time I wrote on GM stock, I noted it was listed on the Billionaire Hedge Fund Index, a tool now watched to exploit transactions of insiders and wealthy traders. If you had acted immediately on that information to buy GM stock at the time of that writ without measuring the risk, though, your position would likely be slightly negative today; not awful, just down slightly.

Point is, noting an index and trading off of that information are two different things. As I have written many time, you must still think and act like with an awakened speculator mind.

Price Dynamics Over Fundamentals

Every time I reread one of my favorite books, Forecasting Financial Markets by Tony Plummer, I reinforce my preference toward price dynamics, also known as technical analysis. Fundamental information may tell me what to buy or ignore, but it never really tells me the best opportune to buy or sell.

The assumption by many investors is that an article appearing on the web or in a paper has to be acted upon immediately. That couldn’t be further from the truth.

For example, look at the chart that I have provided as reference. It is, in fact, a reference. I made the chart using my own indicators. Should you trust my indicators just because I use them. No. Regardless of the source, you must, MUST create your own charts to be sure you see with your mind fully whether the opportunity before is ripe enough to act on at that point. There is no crime in waiting, but there is often more risk if you act too soon without full assessment.

Notice when I wrote that last article that GM stock was under a bullish signal from my crossover indicators. However, also notice that there was considerable time since that signal when that article was written. And that is a key point: You must assess stock opportunities like an insurance actuary. In other words, is this market swing a young 25 year old or an 82 year old? Expectations of remaining lifespans are distinctively different.

Keep in mind that hedge funds have the funds and the guts to weather large drawdowns. I’m not of that caliber; meaning, I do not have the willingness to suffer being down 10% let alone 20% in a stock while I wait for it to turn around. As the Jedi Master, Yoda, might say, “The boy has no patience.” Yes, and I admit it. It’s what saved me during the tech wreck and the recent debacle on the market in 2008.

If you recall, I noted in February that the weekly chart of GM stock did not seem too impressive. Since its IPO in November, 2010, the stock had made its highest high of 39.48 within a couple of months. Since that time, though, GM stock tanked to a low of 19.00 and 19.05 for a double bottom.

Point was, the stock was far below its IPO price of 33 and still is well below opening day price of 35. In fact, the stock can’t even rise above past broken support at 28.16.

Understand the Dilemma Before You Act

What do those billionaires know that the charts have yet to reveal? And if they were already long the stock, then who is going to come in to buy and propel the stock higher? Would they buy more? Or were they counting on starting a rally, then selling their stock to the us, the public, as we jumped on the train?

That was and still is an interesting scenario to ponder. And I for one have been watching it closely, which is why I write on it today.

My take is, those billionaires are probably right in their choice. GM will one day rise to its IPO price and may surpass it. I just cannot tell you when; and neither can they.

So, what in my opinion is the best that we can do as traders? Wait and watch using the charts. Wait for a pullback to previous support or broken resistance levels; and if the volatility is higher, then consider selling put options. More important, wait for a confirmation that the general market is on our side and in the mood to be bullish. Then, if you buy, you will at least be empowered with the best odds possible.

[Dislosure: Frank does not have any open positions on GM stock or options at the time of this article]