Overvalued stocks like this one are at risk of a pullback following the rally. How to capitalize on it
As the equity markets grind to new all-time highs, stocks that have been bid up over the past couple of months significantly beyond their average valuation are at risk of a pullback. One stock that fits this criteria is General Electric as it reaches prices we haven’t seen since 2017 and at the highest end of its historical valuation. In my opinion, the upside from here is limited and an opportunity to fade this incredible strength and momentum. If we look at a long-term chart of GE, it’s rallied nearly 200% over the past 18 months and has reached a major bearish trendline that has been in place since 2007-2008 GFC. We’re just trading up against this trendline and a potential stopping point for this rally. Additionally, momentum indicators have reached severely overbought conditions that statistically point to a potential pullback in the short run. What’s more worrying than the chart are the fundamentals. GE now trades at 33 times forward earnings, which is the highest we’ve seen over the past 10 years by more than 20%. GE is effectively trading at the same price as it was in 2017, when it earned nearly three times more profits. GE is expected to return back to its 2017 EPS in the 2026-2027 timeframe, and investors are being overly optimistic in my opinion based on where it’s trading now. The trade What’s interesting is that despite trading at 7-year highs, GE’s implied volatility is quite expensive. This provides an environment that favors selling options and fading this move. It also aligns with a neutral/bearish outlook on GE based on the technical and fundamental factors. I’m looking to Sell the April 12 $157.50/$170 call vertical at a $5.42 Credit. This trade structure involves: Selling the April 12 $157.50 Call Buying the April 12 $170 Call This strategy has a maximum risk of $708 per contract if GE closes above $170 at expiration, and a maximum reward of $542 per contract if GE is below its current price of $157.50 at expiration. DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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