Goldman Sachs: Delivering Investment Masochism

On June 21 Goldman Sachs opined:

We are recommending a short position in the S&P 500 index with a target of 1285 (roughly 5% below current levels) and a stop on a close above 1390. This morning, the Philly Fed print of -16.6, down sequentially and worse than expected, provides further evidence that weakness has extended into June.

Although yesterday’s FOMC delivered easing as expected, with a dovish statement, positive risk sentiment ahead of the FOMC had already buoyed markets. And we now think, with incremental US monetary policy on hold, the market will need to confront a deteriorating growth picture near term.

The risk to our recommendation is that the data soon reverts to the 2-percent growth path our economists expect, that China growth turns, or that European policy-makers’ rhetoric buoys risk sentiment further from here, with the upcoming end-of-June summit a focal point on this count.

On July 2 they were stopped out of their “call”:

We have been stopped out of our short S&P 500 recommendation on today’s close of 1365.5, just above our 1365 stop, for a potential loss of 1.05%. After an initial sharp move lower, we tightened the stop, and today’s rally pushed the index just above it.

This trade recommendation, opened on June 21st following a weak Philly Fed survey print, was predicated on ongoing weakness in the June data set with the recognition that policy developments in Europe were a risk. Indeed, policy initiatives flowing from last week’s European summit exceeded expectations, sparking a sharp rally that began late last Thursday and extended into last Friday.

Yet, the data continue to surprise to the downside: weekly claims are trending higher, today’s ISM was down sequentially and well below expectations, and GLI growth and acceleration remain solidly negative. Looking ahead, our US economics team expects to see a 75K print for June payrolls on Friday, which is below consensus expectations of a 90K number. And so apart from a re-rating higher of European prospects, the market continues to look vulnerable to ongoing cyclical weakness and our bias remains to the downside.

Let me now add a definition of a masochist–otherwise known as the investors who followed Goldman’s fundamental folly:

A person who is gratified by pain, degradation, etc., that is self-imposed or imposed by others. A person who finds pleasure in self-denial, submissiveness, etc.

Too harsh of a term to describe investors who followed Goldman’s advise? Not at all. It’s not an issue of harsh or not harsh. The issue is one of investment masochism.

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