Price Anomalies - Trading the Goldman Sachs Downgrade
Zuckerman in The Man Who Solved the Market revealed that many of the price anomalies that were exploited by Jim Simons and his associates were neither
novel, nor sopisticated, but rather they were simply patterns that were being ignored by the rest of the market.
On 14 November 2019 analysts at Goldman Sachs set a price target price of 580 GBX on mining stock Fresnillo - this represented a potential downside of 10% from the company's opening price of 643 GBX. In the wake of the downgrade, shares in Fresnillo fell back by 5%, before bouncing off the lows.
On 15 November 2019 analysts at Goldman Sachs also set a target price of 3860 GBX on Berkeley Group Holdings - this represented a 13.9% potential decrease from the company's opening price of 4485 GBX. Such is Goldman Sachs' reputation that these calls are capable of moving the market - not least because of the notion of availability cascades. History suggests, however, that after an initial sell off on the back of a GS downgrade,
stocks recover quickly, such that those that buy on the back of the news, and after an initial GS inspired price fall, benefit significantly over the longer term. There are any number of conspiracy theories out there, the veracity of which remain unproven.
In more simple terms, it would seem that a downgrade from Goldman Sachs has the effect of blowing the froth away - causing market makers to adopt a defensive position and accordingly creating a significant entry point for more serious long term investors.
Lets put the buy stocks on the back of a Goldman Sachs downgrade theory to the test. We will add eighteen more stocks in due course.