Goldman Sachs and Financials XLF: A Tale of Two Charts

By: Kingsley_Anderson

Generally, stocks in the same industry move together. If airline stocks are trending higher, logic would dictate each of the stocks within the group should be moving higher as well. Now, some may move faster and higher than others, those are the best in breed. Sometimes, but rarely, a stock will not move at all. These are usually the “cheap” stocks that some may call a value play.

Wall Street is a fashion show. It does not matter if in fact a company or industry is performing well or poorly. What matters is what people think about the company or industry. The monocle industry could be making a killing right now as far as profits are concerned. But, if no one knows or cares on Wall Street, the stock will not move.

Examples of recent fashionable equities would be the solar stocks, such as First Solar ( FSLR ). Not too long ago, the companies that made chips (the kind in computers, not the kind you eat) were all the rage, e.g. JDSU .

Sometimes, a stock will not follow its group. That is extremely significant. Either something fantastic, or terrible, is happening in regards to the company.

The example I bring you today concerns Goldman Sachs (GS). Back in November of 2008, I essentially drop-kicked GS. Now, however, it has been showing some strength. Check out the chart below:

Now, take a look at the financials ETF , XLF . It does not take a rocket scientist to see this stock is caught in a downtrend. As has been broadcasted over the news for the last year or so, the financials are still in trouble. Will some of the banks be nationalized, destroying stockholder equity? Will another shoe drop resulting in more troubled banks? There is a lot of uncertainty in regards to financials. The street currently does not hold this industry in high regard, resulting in the long downtrend.

Has it bottomed? That, I do not know, but until it breaks this trend, I would not touch XLF with a ten-foot pole. Shouldn 't GS also be moving in the same direction as XLF ? It should, which makes the divergence quite significant. There is a good chance that more gains can be expected from GS. Would I purchase it as this time? I would not as I only buy stocks if the primary trend is heading upward. If you do decide to take a shot at GS, do your homework and practice risk management.

Positions: None

By Kingsley Anderson

http://tradethebreakout.blogspot.com

Kingsley Anderson (pseudonym) is a long-time individual trader. When not analyzing stocks, he is an attorney at a large law firm. Prior to entering private practice, he served as a judge advocate in the U.S. Army for five years and continues to serve in the U.S. Army Reserves. Kingsley primarily relies on technical analysis to decipher the markets.
Kingsley's website is Trade The Breakout (http://tradethebreakout.blogspot.com)

Copyright © 2009 Kingsley Anderson - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.