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One of my favorite sentiment indicators is bellwether stocks — key stocks that are leaders in their fields. When investors buy or sell these shares, it’s usually a good sign of confidence or the lack of it in that sector of the market and sometimes even the economy.
Each bull market has a new group of bellwethers. They are the stocks that start moving higher and whose developments are seen as a sign of what’s likely to happen to all other companies in their sector. Previous bellwethers have been companies like IBM, Intel, General Motors, and Citigroup. A recent one that was still fairly popular when I wrote this book was Google.
My favorite bellwether stock from the bull market that ended in 2007 was Goldman Sachs (NYSE: GS), the king of investment banks in the 21st century. Goldman’s businesses span the entire world and include not just traditional investment banking functions of advising on and underwriting takeovers and initial public offerings (IPOs), but running hedge funds, trading aggressively in all markets, and actually owning and operating businesses. This diversified business model makes Goldman an excellent bellwether for the market.
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