Goldman Sachs Group (NYSE: GS, Stock Forum) has come under selling pressure recently after JPMorgan slashed the company's 2009 earnings forecast from $7.00 per share to $6.25 per share. JPMorgan believes that write-downs are likely to persist through the first half of 2009. What's more, the brokerage firm introduced a 2009 year-end target of $95 for GS.
Goldman Sachs remains a global leader in mergers and acquisitions advice and securities underwriting, offering a variety of investment banking and asset management services to corporate and government clients, as well as institutional and individual investors. It owns Goldman Sachs Execution & Clearing, one of the largest market makers on the New York Stock Exchange, and is also a leading market maker for fixed income products, currencies, and commodities.
Technically speaking, the shares of GS have dropped more than 64% since the start of 2008. In fact, the security has been in a steady downtrend since reaching a peak in October 2007 at $250.70, resulting in a loss of nearly 70%. The equity is currently encountering resistance at its 10-week moving average, which GS has not closed a session above since the beginning of August. Additional resistance lies overhead at the 80 level -- a round-number level that has capped the equity since the beginning of November.
Another key element to the stock’s backdrop that needs to be examined is its sentiment backdrop. As contrarians, we are looking for sentiment that runs counter to a security’s technical trend as a sign of a potential bullish or bearish play. Extreme optimism on a down-trending stock indicates that the shares may succumb to additional selling pressure as the remaining bulls could unload their long positions in the face of the stock’s weakness. On the other hand, extreme pessimism on an up-trending stock indicates that there is still potential sideline money available, which could move in and push the shares higher.
One important sentiment indicator is the Schaeffer’s put/call open interest ratio (SOIR). This ratio compares put open interest against call open interest among options that expire in less than three months, allowing a clearer picture of the sentiment among short-term options speculators. A reading above 1.0 indicates that put open interest outnumbers call open interest.
For GS, the SOIR stands at 0.74, as call open interest outnumbers put open interest. However, on a historical basis, this ratio is actually lower than all the readings taken during the past year. In other words, short-term options speculators have not been more optimistically aligned toward the stock at any other time, indicating that hopes are riding high for the shares to break out.
Another sentiment indicator that should be reviewed is analyst rankings, as shifts in the various ratings can cause shifts in buying or selling pressure. Zacks reports that GS has earned five “buy” or better ratings and seven “holds.” While the reading has a somewhat bearish slant, there is still room for additional downgrades should the security fail to overcome technical resistance.
Meanwhile, the average 12-month price target shows that expectations for GS are still relatively high. The price-target estimate for the security stands at $112.36, according to Thomson Financial. This lofty reading implies that analysts are expecting the shares to rally more than 45% from their December 22 closing price. Any price-target cuts from this smitten group could push the shares lower.
Elsewhere, we find that short sellers have taken an interest in the shares. Short interest can be a useful sentiment indicator, since it measures the level of investor pessimism toward a given stock. Specifically, short interest is created when an investor sells shares of a stock that he or she has borrowed from a broker, but does not own outright. Since the beginning of October, the number of GS shares sold short has nearly doubled to 14.5 million shares. This accumulation of bearish bets accounts for more than 3.7% of the company’s total float. Should the bears continue to sell short the shares of GS, the stock could be pulled lower by the activity.
Overall, traders should keep a close watch on the stock’s 80 level and resistance at its 10-week moving average. A rejection at this level could spell trouble for the shares. With most of the sentiment reading lingering in the bulls’ camp on this underperforming stock, we could see selling take over as disappointed investors sell the equity and go looking for greener opportunities.
By Jocelynn Drake