The End of an Era: The Last Original Dow Stock Falls
It’s the end of an era.
General Electric’s run as a Dow component is finished. The Dow Jones Industrial Average finally announced it’s giving the floundering conglomerate the boot. After a breathtaking fall from grace, GE is losing its spot to Walgreens as the Dow searches for balance.
I’ve patiently waited for this moment for months. If GE continues to spiral lower, I wrote back in October, it will get kicked to the curb and we’ll have a shot at picking up shares of the former American industrial superpower.
I know that might sound crazy. But stocks booted from the Dow can trigger a profitable hate trade. These are the plays that no analyst or investor will touch. They become so reviled that no one’s left to sell and push the price lower.
That’s when the fun begins…
The Dow kicked the aluminum producer to the curb back in 2013. Alcoa had enjoyed an impressive 54 years as a member of the Dow Jones Industrial Average. But its low share price had become a bit of a problem for the Dow (which, unlike the S&P 500, is a price-weighted index). That means that toward the end of its run, even a major move in Alcoa shares barely registered on the Dow. In that sense, the company had become irrelevant.
In fairness, the stock was already considered a joke long before it lost its spot on the Dow. It never beat earnings expectations and shares always seemed to find lower ground. No one took the company seriously.
But the banishment from the Dow was just the spark the stock needed to begin a new rally. The week the stock was jettisoned from the Dow was rock bottom for Alcoa. From there, a massive change in trend helped carry this stock to gains of more than 100% in a little more than a year.
Not bad for one of Wall Street’s most hated names at the time. Getting tossed from the Dow was the best thing that ever happened to Alcoa stock.
Could we see a similar comeback in GE?
We already started to see some life in GE shares just one month ago. Concerns of an ongoing trade spat with China and the dollar’s furious rally were crushing multinational industrial names. But GE looked like it was bottoming out along with some other major industrial stocks.
But bounce didn’t extend into a full-fledged rally. The trade war news cycle won’t go away — and many of these industrial names continue to feel the heat.
Now, our little GE comeback rests on a potential bounce as the company loses its blue chip status.
We started to pay attention to GE when shares began to bottom out in April. After improving of the better part of the past four weeks, we were finally treated to what we thought was a significant breakout in late May.
But buyers haven’t followed through. I mentioned last month that while I liked how the stock gapped higher, I wasn’t too happy about the crazy media attention the move was receiving…
With GE leaving the Dow, we have a better shot at an under-the-radar rally materializing. Bottom line: It’s make-or-break time for GE. If buyers step in here, GE might finally have a shot at a post-Dow rally.