Why Goldman Sachs Group Inc (GS) Could Be About to Take Off

Goldman Sachs Group Inc (GS) is taking a breather after a huge post-election rally

Jan 10, 2017 at 11:19 AM
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The months since the U.S. presidential election have been a whirlwind for many stocks, and banks have been among the biggest beneficiaries. But many of these financial names have also been taking a breather over the last few weeks. Among these is Goldman Sachs Group Inc (NYSE:GS) -- which is up roughly 33% from its Nov. 8 close, but has been stalling out in the $240-$245 region since early December. Despite a slight pullback for the shares today, down 0.7% to $241.73, though, there are signs the stock could have room to run. In fact, like sector peer JPMorgan Chase & Co. (NYSE:JPM), outperforming GS has seen an unusual amount of bearish sentiment of late.

The skepticism starts with the brokerage bunch, where half of analysts following the equity maintain a "hold" or worse opinion. In fact, Citigroup downgraded GS to "sell" from "hold" just this morning. Specifically, the brokerage firm said it doesn't "see a compelling risk/reward" for bank stocks following the recent post-election rally, and for GS, the "path is relatively uncertain and the bar is relatively high." Moreover, the average 12-month price target of $234.23 sits at a discount to the stock's current level. Should analysts begin to upwardly revise their expectations, GS shares could get a boost.

Elsewhere, short interest on GS is relatively low, with just over 2% of the stock's available float wrapped up in these bearish bets. But short interest has risen nearly 32% during the most recent two-week reporting period alone -- echoing a surprising trend among its fellow big-cap bank stocks. That means there's been an influx of traders expecting a selloff for the outperformer. An unwinding of these pessimistic bets could be a boon for the shares.

Options traders have been unusually put-heavy, as well. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), GS sports a 10-week put/call volume ratio of 0.70. Though this shows long calls lead puts on an absolute basis, the reading also sits just 2 percentage points from an annual bearish high -- meaning puts have been bought to open relative to calls at an accelerated clip.

Considering the stock's huge post-election climb, it's possible that some recent put buying has come at the hands of shareholders looking to protect their profits. Today, however, GS calls are trading at an accelerated rate, and it looks like some speculators may be eyeing a recovery by week's end, buying to open the weekly 1/13 245-strike call -- the most active option so far.

From a technical standpoint, GS has been quite impressive, despite the recent stall. The shares have outperformed the broader S&P 500 Index (SPX) by more than 36 percentage points over the last three months, and tapped a nine-year high of $246.20 last Friday, Jan. 6 -- just shy of the stock's Oct. 2007 record peak.

Today's pullback has Goldman Sachs Group Inc (NYSE:GS) testing the 20-day moving average, which has served as support for more than three months. But it also has the stock's 14-day Relative Strength Index (RSI) down to 62 after this reading spent much of November and December in overbought territory. This could suggest that the breather short sellers and put buyers have been bracing for has already come to pass, and may leave the door open for GS to resume its uptrend, as the remaining bearish positions unwind.

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