Goldman Sachs to Clients: Bet Against The S&P 500

According to Bloomberg.com (link below), Goldman Sachs is advising its clients to bet against the S&P 500 using a "bear put spread".

A "bear put spread" is an options strategy in which a trader will profit from a decline in the price of an underlying asset. So in this case, Goldman Sachs expects that the S&P 500 will drop from its current levels.

More specifically, Goldman Sachs feels as though the S&P 500 might retest its November lows (752.44).

The S&P 500 is currently trading at 825.44.

Goldman Sachs cites weak Q4 profits and "waning investor confidence in Barack Obama's economic stimulus plan" as the two main reasons why they expect the index to fall.

A report, which was written by Krag Gregory and John Marshall, was distributed to clients of Goldman Sachs earlier today. The report advocated buying March 825 puts and selling March 745 puts on the S&P 500, which would create a "bear put spread".

The report stated that "our U.S. economics team sees little evidence that the downward spiral is abating".

Some people emailed me today, more than a little choked that Goldman Sachs was advising its clients to bet against the S&P 500.

"A company that accepts TARP funds should not be advising people to bet against the S&P 500 or any other American stock index" was the general theme of the emails.

Is it wrong for Goldman Sachs to be making calls like this, when the S&P 500 (and other major indexes) are teetering on the brink of new lows? Will this call become a self-fulfilling prophecy as rattled investors look for a reason to stay on the sidelines?

Or is Goldman Sachs just trying to make money for its clients, and the fact that they received TARP funds is irrelevant and has no bearing on this particular call?

Source: Bloomberg.com - Goldman Says Buy Puts As U.S. Stocks May Resume Drop

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