Will Goldman Sachs Break Out?

With shares of Goldman Sachs (NYSE:GS) trading around $142, is GS an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Goldman Sachs provides investment banking, securities, and investment management services, as well as financial services to corporations, financial institutions, governments, and high-net-worth individuals worldwide. The company operates in four major segments: investment banking, institutional client services, investing and lending, and investment management. Through these segments, Goldman Sachs is able to provide a multitude of financial products and services. Goldman Sachs is a respected company that operates in a sector that is the backbone of the economy.

T = Technicals on the Stock Chart are Weak

After reaching all-time highs in 2007, Goldman Sachs has seen a volatile downtrend. As soon as the stock is bid much higher, sellers take over and push it back down. Currently, Goldman Sachs is trading at the top end of its multi-year downtrend. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Goldman Sachs is trading around its key averages which signal neutral price action in the near-term.

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GS

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Goldman Sachs options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Goldman Sachs Options

29.38%

80%

84%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

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Put IV Skew

Call IV Skew

May Options

Steep

Average

June Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion…

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Goldman Sachs’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Goldman Sachs look like and more importantly, how did the markets like these numbers?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

187.63%

-439.29%

-3.78%

151.28%

Revenue Growth (Y-O-Y)

52.69%

132.81%

-8.98%

-16.32%

Earnings Reaction

4.05%

-1.02%

0.3%

-0.73%

Goldman Sachs has seen very mixed earnings and revenue over the last four quarters. From these figures, the markets have been confused about Goldman Sachs’s last four earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Goldman Sachs stock done relative to its peers, JPMorgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS), Citigroup (NYSE:C) and sector?

Goldman Sachs

JPMorgan Chase

Morgan Stanley

Citigroup

Sector

Year-to-Date Return

21.85%

9.39%

18.49%

25.96%

11.54%

Goldman Sachs has been one of the performance leaders of its sector, year-to-date.

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Conclusion

Goldman Sachs participates in an industry that is the backbone of the economy and makes the connections required for global growth. The stock is part of a multi-year downtrend and is actually trading near the top of this trend, so, a breakout from these prices would be very positive for investors. Earnings and revenue have only confused investors over the last four quarters. However, Goldman Sachs has been a strong performer year-to-date. Look for Goldman Sachs to continue to OUTPERFORM.

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