"Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions."
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Sun Tzu

Tuesday, May 24, 2011

Dr. Goldman: Does the Stock Predict Market Direction?

I don't know why, but some investors consider Goldman Sachs a leading market indicator. In fact, there is a saying "as goes Goldman, so goes the market" (check out this 2009 Bespoke post on the subject). So let's take a look at how GS's stock price correlated to the S&P500 in the last five years:


GS "predicted the 2009 market low and 2010 "flash crash". Obviously, the stock has been underperforming in recent months. Will the S&P follow?
I would be careful with the conclusion since two incidents are statistically insignificant. It will be interesting to see, though, if "Dr. Goldman" is right this time.