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Why This Time is Different


...there is no such thing as free money on Wall Street (as certain yield hungry investors are only now finding out), and most often the "free money" trades are in reality the most dangerous.


I understand the desire to want to step in and trade the financials. It's been a long time since we've seen a Goldman Sachs (GS) off 4% in one session, almost 10% for the month, nearly 16% year-to-date.

And after all, these are the bull market winners! The broker dealers, as measured by the Amex Broker-Dealer Index (XBD), are up 175% over the past five years running, compared to the S&P 500's 58% return, and nearly doubling the Nasdaq Composite's 90% return. It's like betting against UCLA in the 1974 NCAA Mens Basketball Championship. How can you do that?!?! They've won 7 straight!

Look at this chart of Goldman Sachs (GS) on a point and figure basis. This long-term trendline has been definitively violated. The stock may bounce, as it did when it first violated the trendline earlier this month (no doubt the move from 176 to 198 was a fine trade). But now the game has shifted. Even if this stock does bounce, it will most likely underperform other technically sound stocks, even in the bounce, and especially if the market begins to grope for a bottom.

Trades such as the GS trade may look like "free money"; they are oversold, they are former winners. But there is no such thing as free money on Wall Street (as certain yield hungry investors are only now finding out), and most often the "free money" trades are in reality the most dangerous. In my opinion, this is a game of forcing yourself to look where others are not; forcing yourself to make the hard trades and investments with the least amount of fanfare and attraction.

Therefore, my thesis is bounces in financials are opportunities to sell them and other weak relative strength stocks, and look for stocks in sectors that are outperforming below the surface, such as the Telecom and Biotech.

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No positions in stocks mentioned.

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