When asked my opinion of Goldman Sachs (NYSE: GS) in the summer of 2008 when financial stocks and banks were dropping like flies, I always said GS is the best house in a bad neighborhood. It was true that it is the best-run investment bank, but if all business lines were deteriorating — and they were at the time — then the stock at $185 was probably a better short. GS made it all the way down to $46.75 by the fall of 2008.

I have no problem with Goldman Sachs per se as they still are the best-run Wall Street franchise. In fact, I am on record as recommending the stock in the mid-$70s before the market made a bottom in March 2009. But there is a world of difference between buying GS at $185 in a hostile environment in the summer of 2008 (when I thought it was a short) and buying it at $75 when the market has been “bombed out” as it was in the winter of 2009. Then, it had already become clear that it was a survivor with much less competition than it had a year earlier.

I have no problem flipping from short to long in my intermediate view of a company if there is a dramatic shift in the fundamental picture — and in this case there was such a shift.

Right now, Goldman is in some political trouble, which makes it neither a long nor a short — the stock is in a trading range. Brokers are highly sensitive and nearly always lead the market; they act like canaries in a stock mine. Both Morgan Stanley (NYSE: MS) and Goldman Sachs bottomed before the S&P 500 in the fall of 2008, while the S&P made a new low in March 2009. Then, they both topped out in October 2009, while the S&P 500 hit its high for the year in April 2010.

So, if the brokers begin to outperform the S&P 500 again, even if the news flow is bad, I would pay attention, as such actions before have meant that the market is ready to bottom.

What most investors miss — which is why it costs them a lot of money — is that both Morgan Stanley and Goldman Sachs are trading stocks.  They are not for buy-and-holders. Since there is too much debt in the U.S. financial system, which is not working properly, financial intermediaries like GS and MS aren’t working properly for their shareholders either.

This up-down, up-down action in GS and MS resembles the action in Japanese banks since making their highs in 1988 (again before the Nikkei). The action in Nomura (NYSE: NMR), Morgan Stanley and HDFC Bank (NYSE: HDB) is telling. While both NMR and MS have done little in the past 10 years, HDB is up more than 10-fold. This is because the Indian banking system is healthy and the Indian economy is growing at 8%.

I can use the above example for all of our favorite BRIC markets, where most large financial institutions turned out to be great buy-and-hold stocks over the past 10 years. In my opinion, the next 10 years will be similar, as only BRIC and other related emerging markets developed based on unleveraged organic economic growth.

And Goldman and Morgan? Expect more volatility with little to show for it in the long term.