Hey, son, you wanna try the big top?
Have you had your fill yet? With the stock market gyrating as much as it has the past two days, it’s hard to discern what investors really think. But you can take your own temperature.
“Take a moment to think about what you did when the news hit and the market dropped — were you gleefully checking your liquidity for a buying opportunity or packing up the circus tents because the fun has been had and now it’s time for reality to set in,” Joshua Brown writes at his Reformed Broker blog. “It really is that cut-and-dry.”
The movements in the stock market over the next few weeks will say a lot about what people really think about the recovery, especially with the added uncertainty of the Goldman suit and who else could be implicated next. The DJIA was down this morning, but rose sharply this afternoon (for reasons that are still unclear.) Goldman was down this morning, too, on top of Friday’s 13% drop, but lately have climbed into the green, up 1.4%.
Friday’s double-digit drop was a rarity; Goldman shares have dropped 10% or more on only 13 occasions since the firm went public in 1999. But, as Bespoke Investment Group points out, those declines have proven to be short-lived.
During the sessions after the double-digit percentage drops, GS has averaged a 3.1% gain, though the day after has been positive just 50% of the time, firm notes. And the returns in weeks following the big down days have been good, as the stock has risen during the next week 10 times, with an average 11% gain.
Of course, a quick Goldman bounce may be trickier this time, especially since this is the first time a fraud charge has been part of the mix.
The direct earnings impact of the civil-fraud charges should be manageable, FBR Capital assesses, but watch out for further regulatory impact: “investors should not ignore the potential regulatory spiral that may follow the SEC’s recent actions and the potential for a valuation overhang despite an otherwise strong operating environment.”
In particular, the firm says it “inferred” from the SEC conference call that more actions against the industry are coming. Moreover, foreign regulators in Europe also appear ready to dig in.
Perhaps the most unsettling aspect of the charges is the level of uncertainty they create. “There is simply no telling how badly this could impact the banks and the broader market, but with stocks strenuously overbought and struggling to find a new bullish catalyst this couldn’t be happening at a worse time for the market,” the Pragmatic Capitalist says.
“The urge to buy the dip in banks appears fraught with massive risks,” blog adds. “With this kind of uncertainty there is simply no reason to buy a sector that is just 3% off a new 52-week high.”
