Large-cap financial stocks such as Goldman Sachs Group Inc (NYSE:GS) have seen some of the largest gains since Donald Trump’s election in early November. While I agree that the prospects of a more business- and banking-friendly environment under a Trump regime would be positive for banks, the near- to possibly intermediate-term rally in GS stock is overdone.
As I discussed on Dec. 5 in this column, the financial sector of the S&P 500 — as represented by the Financial Select Sector SPDR Fund (NYSEARCA:XLF) — still has to do a lot of catching up with the broader stock market, at least through a multiyear lens.
And while I do think bank stocks like Goldman Sachs could continue to outperform, one of the most important things I have learned over the past nearly 20 years as a trader is to look at stocks in multiple time frames.
As it pertains to GS stock right now, just because shares look promising for the next six to 12 months does not mean you have to blindly buy. Especially after Goldman has ripped off close to 40% in a matter of weeks!
Some argue against market timing, but I have learned that buying dips and selling rips over time makes a big positive difference in my P&L curve, as opposed to chasing stocks up or down.
GS Stock Charts
As a result of the vertical leap in Goldman Sachs stock in recent weeks, on the multiyear weekly chart, we see that shares have now arrived at levels last seen in late 2007.
In fact, as of yesterday’s close, GS stock is on track to close this week at all-time record highs.
Through a technical lens, while this ultimately could continue to provide a positive tailwind for the stock, in the near- to intermediate-term it likely will be difficult for the stock to sustainable push above the 2007 highs. Big multiyear highs are rarely overtaken on a sustainable basis on the first try.
Also, the vertical rally of late is running on fumes from a momentum perspective. Year-end performance chasing on the part of underperforming fund managers could continue to provide some sort of a bid for Goldman Sachs. But anyone with any sort of risk management plan will not try to buy into a stock after a run like this.
Good traders let stocks come to their levels of interest while bad and impatient traders chase stocks higher at the highs and short them at the lows.
On the daily chart, we see that GS stock now is well extended not only above its yellow 21-day moving average, but also well above its blue 8-day moving average.
If history is any guidance, at these levels of overbought, the best near-term case for Goldman now is to consolidate sideways for a few weeks and possibly find initial support around the $225-$230 range, as I marked on the chart with the blue box.
From there, and upon a bullish reversal, traders likely will find better-probability trades on the long side in GS stock once more. That also could set the stock up to possibly move past its 2007 highs on a more sustainable basis.
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