When GE Sneezes The Market Catches A Flu...

The old adage that says that when GE sneezes, the market catches a flu has some truth behind it afterall. GE disappointed the market with terrible earnings today and fell 12.79% in a single day. In fact, this is the largest single day drop since the crash of Oct 1987 (Black Monday)!! Being the second biggest cap stock in the US Market (the biggest being Exxon Mobil) and the last surviving pioneer component of the Dow Jones Industrials Average, any big movements in the stock price of GE will definitely move the market. Being also one of the most important conglomerates in the US, a disappointment in earnings would lead to doubts as to the profitability of all other companies in general, leading to a quick revaluation of their stock prices, which was what we witnessed today. The good news is this, this drop is definitely overdone as investors rush to seal in some of the precious profits so far ahead of the weekend. At 17 times multiple, GE's definitely slightly oversold here.

This is definitely strike 2 to the bulls as their short term defense line of 12500 was broken decisively and with rising volume. The good news here is that we got a capitulation in the consumer sentiment numbers today as it hit the lowest point since 1982. Such multi-year lows usually mark important turning points. Some readers are also asking me how a rally is possible when bad news seems to be coming in torrents. Well, the reason is simple... the market has priced in these mess since Nov 2007 and as a discounting mechanism and due to reflexivity, these bad news are beginning to surface more and more now, justifying the valuation in the markets, which is a good thing.

Even though an eruption is highly possible, what I am seeing here is a pattern similar to what happened back in 1987 after Black Monday. The Dow didn't go straight up from there but begun an extremely slow process of recovery on an extremely gradual positive channel all of 1988 until the bulls returned in force in 1989. With investors this informed and educated, this process may take a lot shorter than before. Even in this scenario, it seems highly unlikely for the market test the lows again as a gradual positive channel has already been formed.

This may take longer than I expected to resolve but there definitely are strength to be found in sector rotation. This is the market for only 2 kinds of traders... long term investors taking advantage of the discount and extremely nimble and skilled sector stockpickers. Get my picks here!