11:00pm (EST)
The bears finally came to life on Friday but if it weren’t for the Goldman Sachs (GS, $160.70, down $23.57) headline they might still be sleeping.
The market got a slew of earnings news that was mostly good and was handling the Google (GOOG, $550.15, down $45.15) sell-off well as the market made into positive territory shortly after the open. However, when news hit that the SEC was charging Goldman with fraud, the market tanked and the selling pressure started.
Fraud was the one word that woke the bears up from their sleep and they immediately attacked not only Goldman but the entire market. Goldman was trading well above $183 and tanked to the $160’s before finding a bottom at $155. The 13% drop in shares caused a rush to safety as investors dumped stocks and ran to treasuries.
As a result, the major indexes all lost over 1% so let’s go over the good and bad.
The Dow lost 125 points, or 1.1%, on Friday to finish at 11,018 but still managed to close the week with a slight gain. The index also held the 11,000 level after starting the week below it and added 21 points, or 0.2%.
The Nasdaq dropped 34 points, or 1.4%, to settle at 2,481 but advanced 27 points for the week, or 1.1%. The index fell below 2,500 but finished higher for the 7th straight week and 9 out of the past 10.
The S&P 500 was the weakest link as it got whacked for nearly 20 points, or 1.6%, and ended the week with a loss. The index slipped 2 points, or 0.2%, and heads into Monday trading at 1,192.
The fact that the SEC is charging Goldman is a black eye for the company and they have already said the allegations were completely unfounded and will fight the case. While Goldman has deep coffers to wage a lengthy legal battle it’s their reputation we are most worried about.
Although we like to remain on the political sidelines, the timing of the news was a brilliant stroke by Washington wouldn’t you say? The case against Goldman is all about Obama’s financial reform bill but many are questioning what side he is really on. While we agree there needs to be more transparency and regulation, we aren’t so sure Goldman did anything wrong. Obama will use this to fuel the rally for financial reform while Goldman will tell you they lost $90 million on a rookie trader who had little supervision.
The sharp drop in Goldman was an overreaction (to some degree) but shares are likely to be volatile for a few weeks as the gloves come off.
We have been preparing for a correction and last week we allowed for a little fluff when we predicted the Dow would break 11,000. We also mentioned how we thought the index could trade to 11,300-11,400 before we saw a pause and we got to 11,189.
Those targets would likely have been hit and they remain in play but we also have to look at support levels for the Dow as we could see some continued weakness Monday morning. The first wave of support comes in 10,800 and then 10,500. Anything below that could lead to a correction.
As far as the S&P 500, we will be watching to see if the 1,150 level holds but 1,100 would come into the picture if not. We were hoping to reach 1,250-1,275 before we paused and the S&P traded up to 1,213 before Friday’s hit. However, the index will need to rebound back over 1,200 before those targets can be talked about again.
The Nasdaq was quickly approaching our near-term targets of 2,550-2,600 and reached a high of 2,518 on Thursday. Tech has nothing to do with the Financial stocks and they will be the key if the market can rebound or not.
Earnings will begin to pick up and we will go over the list of companies reporting this week in our Monday morning update. We are still working on our playbook for the week and we see a lot of good opportunities developing should the market continue to sell-off.
A lot of investors will likely get nervous if more negative headlines come out and we can almost bet the SEC isn’t through naming names. This means some investors won’t be buying stocks and will be staying out of the market because they are scared we are going lower.
If so, then we want to remind you that put options work just as well in a bear market as call options work in a bull market. We will be back early Monday morning with a fresh outlook and a slew of possible new trades in case we do go lower.
