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Why This Time is Different

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...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.

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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.

No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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