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While navigating the volatile market swings during the recovery from the coronavirus pandemic, Goldman Sachs is honing in on one metric it believes can presage returns — stock liquidity.
The Wall Street firm determined that market liquidity — when a stock is easy to trade without moving its share price — has played an important role in the wild equity markets of 2020 and a single stock's level of liquidity can signal short-term performance.
Goldman defines liquidity as the percentage of the market cap or a stock that could be traded throughout the day, while only expecting a 10 basis point impact on the stock. The firm believes as the market moves higher, investors buy these stocks first because they are the easiest to purchase due to their liquidity.
"We believe when volumes increase in a stock without a proportionate increase in volatility (two day factors in our liquidity model), it bodes well for performance over the subsequent two weeks," Goldman Sachs derivatives analyst Vishal Vivek said in a note to clients. "Our analysis shows stocks where liquidity is in the top decile relative to all S&P 500 stocks have outperformed in the subsequent 1-day, 1-week and 2-week periods this year."
Goldman made a list of stocks for clients that have liquidity in the top decile compared to other S&P 500 names and believes said they could do well in the start of the second half.
"We see potential for these stocks to outperform over the next two weeks," said Vivek. "While fundamentals will ultimately play a signiﬁcant role in a stock's move on earnings, we see improved liquidity providing downside support in periods of extreme volatility."
"Heading into 2Q earnings season, we expect this indicator to play an important role, as market participants continue to assess the impact of the COVID-19 pandemic on company fundamentals, and liquidity broadly remains low," Vivek added.
Take a look at the list here.