Tuesday, June 9, 2009

An Incredible Shorting Opportunity Is At Hand

[ Normxxx Here: WARNING—  If You Have Never Shorted A Stock Before; DON'T START NOW!!!  ]

By Jeff Clark | 8 June 2009

The stock market is poised to collapse.

There's no other way to put it, and I'm hoping that sentence gets your attention. Your financial wellbeing depends on it. Stocks are in truly dangerous territory. The rally over the past three months has done exactly what bear-market rallies are supposed to do— get everyone excited that a new bull market is underway.

This is not a new bull market. It's the biggest bull trap investors are likely to encounter this decade… And you need to avoid it. The problem for potential short sellers has been a persistent bid underneath the stock market and an absence of overwhelmingly bearish chart patterns. Now, however, with the market rally extending into its third month and the investing public growing more and more excited about jumping back into the stock market, many charts are taking on bearish characteristics.

The One That Looks Most Bearish To Me Is Goldman Sachs…

Goldman Sachs is a major Wall Street investment bank. It consistently generates numbers above and beyond that of its competitors. Its traders report the highest return on equity of any firm on the Street. And it is the investment bank with the closest ties to Washington D.C. The fundamental problem with Goldman Sachs is that the numbers are too good. ("Truly astounding… the word Chutzpah simply does not do it justice…")

How is it that in the midst of a financial meltdown that took out Merrill Lynch, Lehman Brothers, AIG, and all the rest of the financial firms, Goldman emerged unscathed? How is it Goldman reported record earnings? How is it that in the culture of Wall Street, which rewards following the herd, Goldman sidestepped all the land mines? Are its traders so much more brilliant than everyone else? Or is there more to the story?

My bet is on the latter. Goldman's last earnings report is like a Salvador Dali painting. It's an aberration of reality. Goldman has a nasty habit of both reporting short-term gains to juice up its quarterly earnings reports and avoiding the markdowns of long-term losing positions that would have a negative effect. It's like depositing your paycheck in the bank and then paying all of your monthly expenses with a credit card. At the end of one month, you have more money than you did before, and you only report the minimum payment required on your credit card as an expense.

The result looks really good on paper. Eventually, though, the funny accounting no longer works. It happened with MCI Communications. It happened with Enron. And it'll happen with Goldman Sachs. I'm not betting on the long-term demise of Goldman— although, I think that's a good bet.

I'm speculating there may be some fundamental event which causes Goldman to break down in the short term, and that event may have something to do with its accounting policies. What I'm really betting on is the technical pattern of Goldman's stock. It's abhorrently bearish in the short term. Take a look at its chart…

This is a textbook example of a bearish rising-wedge pattern. The pattern is formed as a stock moves higher and the difference between the highs and lows gets narrower. You can also see the negative divergence in the moving average convergence divergence (MACD) indicator. Most of the time, these charts break to the downside in a quick and violent move. (You can see it in action here.)

I expect we'll see the same thing from Goldman Sachs, and I'm willing to bet it happens soon.

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