Goldman Leads Market Lower

Tuesday, April 14, 2009

Fundamental Take:
Stocks dropped 137 points as market leader, Goldman Sachs, saw profit-taking losing 11.6% after reporting better-than-expected earnings last night. Goldman set its secondary offering price to raise $5 billion in additional capital at $123 per share. Goldman will use the funds to repay its $10 billion in borrowed TARP funds. Officials are debating whether GS repaying its TARP funds will be a positive development. While it is certainly a sign of strength the Treasury worries it may cause negative perceptions of other financial institutions.
The financial sector followed GS lower losing 6.6% as a group. Stocks were initially higher pre-market but saw selling as the government reported disappointing economic data with an unexpected 1.1% drop in retail sales snapping a 2-month streak of higher sales and lower-than-expected producer prices indicating overall economic weakness. The energy sector showed notable strength with the OIH gaining 1.5% for the day as investors begin to trust the $50 area as a possible floor in crude oil prices.

Technical Take:

The market gapped lower and made a run towards positive off the open on strength in commodity firms. Yet, strength faded in these companies late into the morning as oil double topped and traded lower. GS gapped lower and oscillated around the $123 offering price throughout the morning. Midday selling could not be contained and GS rolled over breaking the lows of the day and solidifying the market's fate for the day. GS flagged and took another leg lower into the close falling to a $115.11 close. GS has been a major leader in the market's recent rally and some profit-taking is not unreasonable. Based on our thesis, we expect GS and the financial sector to enter a consolidation pattern while other sectors take leadership. This has begun to develop with the break higher in the XLK triggering our long technology trade and we await an expected breakout from the OIH's long base. A pull-in in financial names may create a consolidation in the market below the 8,000 resistance level over the next several days.


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