Goldman Sachs – Breaking out of the Blue (Part 2)

After a month of fooling around with EBV-3, Goldman put on a show yesterday advancing 5.2%.  This definitely qualifies as “breaking out of the blue”.  The price action over the last month since we wrote our first blog on this subject (here) has been muted.  This muted price action is characteristic of stock prices that trade on and around their structural lines or Economic Book Value (EBV).

Goldman Sachs with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of GS subsequent to this post will be maintained on Facebook, here.

Again, why should you care?

A trader/investor should always keep an eye on transits up through EBV-3.  We call this “Coming out of the blue”.  Why?  Subsequent to an upward transit of EBV-3, stocks tend to have powerful moves, price wise, that can take a stock from EBV-3 to at least EBV, or EBV+2.  Sometimes investors, if patient, can ride their winners all the way to EBV+5.

Price Target on Goldman Sachs is EBV or $200.

Subsequent to a breakout of EBV-3, relatively quick moves to EBV are not uncommon.  (Relatively quick meaning 3 to 6 months).  We anticipate model price, which is currently $126.56, to increase along with the stock price and/or may trail the actual stock price to EBV.  Why?  The market is making a call on asset quality, not earnings.

This is NOT a specific recommendation; we are just telling you how the math works and what we have seen in the past.

What the market is saying to investors through model price?

As we noted in our earlier blog, the market is recognizing the stated assets on Goldman’s balance sheet is accruing value.  Or said another way, asset prices, stated loans, and whatever assets Goldman has on its $950 billion dollar balance sheet are going up.  This is a huge positive for Goldman, and the market as a whole.  (May also signal policy makers (Central Banks) are making the right moves)

Of course if Goldman reverses and plunges back below EBV-3, this will signal a reversal of the above noted.

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