- Price change forecasts for DJIA components based on Market-Maker hedging are now freely accessible at blockdesk.com.
- The recent inclusion of Goldman Sachs as a DJIA component provides a view of that stock’s prospects, in sharp contrast to the others.
- Upcoming first-quarter 2014 earnings announcement may have significant impact, as seen by the market-making community, of which GS is a leader.
- Corporate direction adjustments may influence future public, investor perceptions of the renowned GS “Vampire Squid” image.
One of the free daily updates on the website blockdesk.com is a map of the upside-vs.-downside price change prospects comparing all 30 DJIA stocks. Its status as of April 15th is shown here:
The upside forecasts, measured by the horizontal scale (in the green area) are the product of analysis of market-makers' [MMs] self-protective hedging behavior (to offset their exposures of firm capital to market price risk) while facilitating volume trade orders for big-money clients.
That analysis also produces a downside-prospect complement, but it is not used directly in this Risk~Reward Tradeoff map. Instead, the balance between the up and down forecast dimensions is used to identify all prior daily forecasts of the last 5 years having similar proportions. They are then examined to find in each case the worst price drawdown in the following 3 months from the forecast-date market price. All of those are averaged to provide a reasonable measure of the harm that might ensue, following the current day's forecast.
That historic average drawdown figure is reflected on the left-side vertical Risk scale of the map. The resulting X - Y coordinates define the map locations for each of the 30 stocks, with duplicates in the case of [ 2 ], [ 3 ], [ 8 ], etc. listed by ticker symbol in the blue area to the right of the map.
The distinctive location of Goldman Sachs (NYSE:GS) at a maximum downside exposure of -25% and an upside prospect of +11% separates it from the bulk of other DJIA components.
Alternative DJIA component investment candidates, like Disney (NYSE:DIS) have as much upside, in the view of MMs, but DIS has only an equal -11% downside exposure, historically. Other candidates, like American Express (NYSE:AXP) and United Technologies (NYSE:UTX) are seen as having almost as much upside (+10%) but have exposed investors to far less (-2%) price risk.
From a quality point of view, stocks or ETFs on this kind of map that are located down and to the right might logically have price performance advantage over those up and to the left. Candidates above the dotted diagonal are "swimming upstream," but those with demonstrated momentum reputations (none evident here) may do well. The green area marks where prospective reward is at least 5x as large as risk exposure.
The case for GS is interesting because it has been through a period of pronounced revaluation of its role in the financial community. That is evident in the history of MM stock price during the past five years, relative to the market average S&P500:
The attitude shift is reflected in GS stock outpacing the SPX in the market recovery months of 2009 at the left of the above picture. But GS' advantage disappeared with the market's modest dip in mid 2010 and seriously worsened over the next two years.
The spike in GS trading volume in 2010, shown by the bar graph at the bottom of the picture marks the point where the company's opportunistic attitude toward its (victim) clients may have become apparent. The black-hat image has apparently not changed much, either in trading volume, or in any significant narrowing of the spread between the stock's price and the S&P500.
Here is how the MM community (including an influential presence of GS, but subject to cannibalistic arbitrage peer pressures) looks at how their big-money fund clients are likely to behave regarding GS, and how that attitude has evolved over the past half-year.
In this picture, the vertical lines are forward-in-time-looking estimates of likely possible price ranges, split by a heavy dot at the contemporaneous market quote.
The current forecast's Range Index of 13 indicates 7 times as much upside price prospect as downside. But the small sample size of only 8 prior such forecast imbalances out of 5 years of trading days is a warning of being overly impressed, one way or another. The thumbnail picture of its extreme location in their overall distribution adds to an understanding of the situation.
Most recently, the widely-read (in the financial community, at least) author Michael Lewis gave the GS firm props in his new book, "Flash Boys", for their being early to join a possible movement in the financial community to reconsolidate equity trading activity into fewer, recognizable, and transparent exchanges and similar trading places.
The plus for GS comes about as apparently a decision to restrict or eliminate the firm's "dark pool" activities. The book's recognition of this action as being important in the shift to incorporating information technology advances for the benefit of an investing public - including institutions as well as individuals - was as much perhaps due to the firm's competitive disadvantage in the present state of affairs as to any true change of heart in its corporate objectives.
Still, the decisions, if real, and pursued actively in the future, could provide a meaningful plus for investors in the stock. Time will tell. But for now, the MM community, in their behaviors, is not yet convinced, despite GS' influential role among them.
Many things, including street estimates of markedly lower EPS estimates, argue for GS stock to be encountering headwinds near term, with earnings announcement due tomorrow. Smart money appraisals look much more favorably on the likes of AXP and UTX.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.