In the wake of the SEC’s charges of fraud against Goldman Sachs (GS), I recommended trying a pairs trade going short GS and long Deutsche Bank (DB). I was betting that either the SEC charges would blow over and DB would rebound sharply, or the gravity of the charges would intensify and GS would sell-off further. I had mixed results given I had to adjust my positioning for high volatility in the options.
Apparently, the SEC continues to investigate DB, but now it once again faces the specter of large losses from its holdings in European sovereign debt. The stock has failed twice at a rapidly declining 50-day moving average (DMA), leading to a major breakdown and a close at 20-month lows on Friday.
The second failure at the 50DMA got my attention and I bought puts at that point. I closed them out on Friday.
While DB has struggled, GS has trended upward along with the rest of the stock market. Its performance relative to DB has been strong the past two months, and in November, GS has broken out to year and a half highs versus DB.
Source: stockcharts.com
I “stumbled” into a pairs trade when I went long GS after it dropped 3.4% on news of insider trading charges at various hedge funds and financial institutions. Unless formal charges are announced involving GS, I am looking for the stock to hold support at the 50DMA or the 200DMA. Fortunately, the profits on the DB trade have more than paid for the GS position and afford me some flexibility. I will be looking to reopen the short DB position if it bounces back into resistance on a relief rally.
*All charts created using TeleChart (unless otherwise noted):
Be careful out there!
Full disclosure: long GS call