Global risk assets displayed an ugly start to the new year last week as growth concerns from China helped accelerate a selling spree that began in the last two trading days of 2015. Among the casualties were banking and brokerage stocks such as Goldman Sachs Group Inc (NYSE:GS), which dropped a cool 9% last week and thus resulted in a real kick in the teeth for the bulls.
Although reaching near-term oversold conditions, GS stock is signaling bigger warnings signs for 2016 that longer-term and active investors alike should respect.
Despite the December rate hike by the Federal Reserve the yield curve continued to flatten (i.e., the popular spread between 10-year and two-year Treasury notes narrowed to the tightest in years).
This flattening of the yield curve a) signals global economic growth concerns and b) isn’t good for banks that make their bread ‘n’ butter money from the difference between near and longer-dated bond yields.
To be clear, Goldman Sachs is not a classic retail or commercial banking stock as such, but its stock tends to act well as an active investing and trading vehicle as a proxy or levered tool to the more classic banking institutions.
Last week’s carnage in banking and brokerage stocks has made more clearly the path of least resistance for these stocks through a three- to nine-month lens. Instead of freaking out, however, active investors should heed the calling of opportunity.
GS Stock Charts
First up, the big-picture and multiyear chart of shares of Goldman Sachs.
While GS stock continued to climb into the middle part of 2015, it has essentially been in a distribution or topping phase since late 2014. From a pattern perspective, the head-and-shoulders formation (as marked by the three blue bubbles) is obviously visible. The horizontal neckline of the formation broke last week, and through this lens, it’s the final confirmation that a bigger drop in the stock is still to come in 2016.
Note how GS stock retested its broken red line of resistance during the autumn rebound, only to reject it and turn violently lower. From a pure pattern perspective, GS stock through the longer-term lens has room to fall into the $130s.
Zooming in on the daily chart we see that GS stock in November found resistance at the 61.8% Fibonacci retracement line, which also coincided with horizontal resistance and the aforementioned red diagonal line. The nearly 20% nonstop drop in the stock since early November, however, now has Goldman’s stock very oversold in the immediate- to near-term, and also from a pattern perspective is increasingly calling for an oversold/dead-kitty bounce.
While quicker traders could look to buy the next bullish reversal for a move back into the mid-$170s, more risk-averse active investors could look to sell into any dead-cat bounce in coming weeks to capture the next leg lower.
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