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Why This Car Company Has A Big Problem

Lawrence Lewitinn
Talking Numbers
Why This Car Company Has A Big Problem

GM and Toyota were trading together until the Japanese market turmoil. Now their fortunes have diverged – and so have their stock prices. How should you trade these two companies?

For over a year, shares of Toyota and General Motors were trading closely together. From the beginning of 2012 until the end of April, shares of the two companies were 78% correlated with each other. That means that, on average, the two stocks went the same direction four out of every five days.

However, since the start of May, the two companies are 25% correlated – trading in the same direction only one out of every four days on average.

GM may have had some bright spots such as the 40% jump in Cadillac sales in May, while Toyota just issued a recall on nearly a quarter of a million cars due to brake issues. However, both GM and Toyota grew total sales at roughly the same pace last month (3% for GM, 2.5% for Toyota).

Why, then, have the two companies been moving in opposite directions?

According to Talking Numbers contributors Steve Cortes, Founder of Veracruz TJM, and Richard Ross, Global Technical Strategist at Auerbach Grayson, the differences stem from macroeconomic issues.

Investors can take a position in one of these car companies to take advantage of the differences between Japan and the US. To hear what Cortes and Ross think traders should do, watch the video above.


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