A Deal with the Devil

It’s looking as though U.S. stocks made an important low yesterday. The S&P 500 fell below February’s low of 1044 and then made a powerful reversal to close at 1,074.   

Leading the way was Goldman Sachs (NYSE:GS). It put in a low at $134.20 and closed the day at $142.56. Today it’s up another $2 or so.   

This powerful reversal move by Goldman is significant for a couple reasons. One, it’s something of repudiation of the idea that financial contagion is spreading from Europe to the United States. And that fear has been driving stock prices lower over the past couple of weeks.   

Goldman Sachs, as well as other banks, have also been weak due to fears that the financial regulation bill that’s in Congress might severely hamper banks’ earnings ability. For instance, if banks have to spin off their trading divisions into separate companies, then valuations for the parent company would necessarily fall.   

And finally, there’s the SEC’s fraud case against Goldman Sachs. Investors are clearly saying that this case probably won’t have much effect on Goldman’s earnings.  

Now, I understand Goldman Sachs presents some challenges to individual investors. It’s a near certainty that its actions in profiting from the housing bubble contributed to the ultimate fallout. And I personally have no problem calling some of Goldman’s (and other banks’) actions unethical.   

At the same time, I don’t think any of us want to see a big sell-off for banking stocks and the stock market at large. 

I suppose you could say we are being asked to make a deal with the devil: let the banks carry on with their trading practices and avoid a revaluation of the stock market.   

It still seems to me that better regulatory oversight and more transparency in the derivatives market would help avoid the risk-taking that brought our banking system to its knees in 2008.  

So what’s next for the stock market? For one, now that some of the froth (OK, ALL of the froth) from the “bullet proof” rally off of the February lows has been reversed, we should some more upside as stocks add some of the valuation they recently lost.   

And I also suspect that the stock market won’t be the “one-way street” it was all Spring, where there were virtually no pullbacks and even 1% dips were bought. I think we’ll see more opportunity to buy stocks at reasonable prices.   

I also think that we won’t see any new highs for the major indices until perhaps this autumn.   

I hope Daily Profit readers used the recent volatility to add a quality stock or two to your portfolio. Last week, I recommended another Bakken oil stock to the Energy World Profits portfolio. This company has some of the best performing wells in the Bakken oil pool, and is drilling new ones as fast as it can.   

Just today, it announced two completed wells that are flowing at rate of 5,000 and 3,000 barrels a day. That’s darn good. And there are more wells to come.   

I was thrilled to get this stock around $14.50 during the recent sell-off. It’s already bounced to $16.50 and there is more on the way. You can learn more about the Bakken oil pool opportunity HERE.