DJ Buying Goldman Sachs and JPMorgan Chase Stock on the Cheap -- Barrons.com
By Steven M. Sears
Goldman Sachs Group has some of the world's greatest traders. Yet many of them failed to perform as well in the first quarter as individual investors who own low-cost exchange-traded funds.
Some people might delight in Goldman's (ticker: GS) difficulties, but schadenfreude is likely to be fleeting. When skilled traders struggle as the unsophisticated triumph, market tumult often follows.
That's because institutional investors are presumed to have the best information. They're supposed to see and hear things long before Main Street realizes what is happening. And as the pros' concerns feed off each other, institutional fears often become market reality.
Goldman's trading revenue fell 18% in the first quarter, compared with the year-ago period, and the bank wasn't alone. JPMorgan Chase (JPM), the Street's other trading powerhouse, reported a 17% trading-revenue decline that reflected the difficulty of making money in a low-volatility market.
If professional traders are in the know, buyers of low-fee ETFs are participants, perhaps unwittingly, in what might be the world's largest behavioral-finance experiment. ETFs are designed to match the performance of an underlying market index. Investors who buy them prosper when markets rally, as has been the case for most of the past decade. Should markets fall and fail to rebound quickly, ETF holders might sour on the products and sell.
One thing that worries institutional investors is the possibility of a sudden swoon in stocks that panics ETF holders and challenges the market's equilibrium, as happened in February 2018. Back then, the Cboe Volatility Index, or VIX, rose 115% in a day and the S&P 500 index fell 4% as funds that made it easy for anyone to "short volatility" exploded.
While it is difficult to time volatility-related selloffs, JPMorgan CEO Jamie Dimon warned in his recent shareholder letter that the fourth quarter's market weakness "might be a harbinger of things to come," citing investor uncertainty related to the Federal Reserve's interest-rate policy; Germany's slowing economy; Brexit; and the U.S.-China trade war.
Still, SPDR S&P 500 ETF Trust (SPY) shareholders are probably cheery. The market is rising, and so are paper profits.
How best to position for such a disconnect? Some investors are hedging portfolio options as they prepare for the bull market's end. Others are selling cash-secured puts on stocks they want to own. The put strategy works well with blue-chip stocks such as Goldman Sachs and JPMorgan, especially if the stocks are bought on weakness.
With Goldman's stock around $205, investors could sell the July $195 put for about $5. If the stock is above the strike price at the option's expiration, investors get to keep the premium. If the stock is below the strike at expiration, investors buy the stock at an effective price of $190, or the strike price less the premium received. The risk is that Goldman's stock falls far below the strike price.
During the past 52 weeks, Goldman's stock has ranged from $151.70 to $262.25. So far this year, the stock is up about 20%. Still, consider this trade only if you are willing to warehouse the stock for several years.
It is too easy to discount concerns about the market when stocks keep advancing and interest rates remain low. But what lurks below the surface looks disconcerting. Aside from problems with poor liquidity, U.S. stock demand remains driven largely by corporations buying back their own shares, not purchases by individual investors, Goldman's portfolio strategists recently told clients.
While first-quarter results suggest that Wall Street's traders might now know as much as they should, it is also possible that their timing, not their knowledge, was an issue. Options strategies like the sale of cash-secured puts allow investors to bet on individual stocks, which might be the most sensible tactic when the bull finally retires.
Steven M. Sears is the chief investment officer of StratiFi Technologies.
(END) Dow Jones Newswires
April 18, 2019 05:59 ET (09:59 GMT)
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