The Despair In Google Deepens

By Dr. Duru written for One-Twenty

March 12, 2006

In a recent missive on the latest drama pounding away at Google's stock, I claimed that the despair caused by the CFO's gaffe was not an investable form of panic. Google's analyst day followed on March 2, 2006 and, as you should have expected, the stock rallied from the sheer relief of the executives pulling off a much better coordinated and optimistic public relations campaign. As also expected, they continued to give the hungry analysts no direct financial guidance. So, after all was said and done, nothing new under the sun really went down. Google's stock has been going down ever since as more negative headlines and mistakes have served to reinforce the deepening despair: a $90 million click-fraud settlement that was not revealed during the analyst day and then the revelation that certain financial forecasts were inadvertantly included in presentation materials posted on the website but not disclosed at the analyst day event. TraderMike says it best in pictures: Google's stock is now officially in bear market mode. The price chart has the look of every burst bubble. I am not yet ready to call the action in GOOG's stock a bubble in the making or popped, but the current picture sure looks awful. I have also officially changed my opinion on the stock (again, not the business) from cautious to full-out bearish.

The GOOG bulls have two major tests ahead of them as far as the stock is concerned: 1) the break of the 200 day moving average is typically assumed to be the sign that a stock (or index) has finally descended into bear market mode. Bulls will have to buy the stock back up and prove once again that this line is support. Otherwise, just like the $400 level, the 200DMA will eventually become resistance as more and more bulls bail on the story. 2) Bulls have done a lot of buying of GOOG stock during these past turbulent months...only to see money go up in flames (this is ESPECIALLY true for folks who keep buying GOOG call options!). The stock is now down 25% from the all-time highs - this kind of drop is typically regarded as a major buying opportunity for bulls. If this buying fails again in the short-term, buyers should finally get tired of losing money and will increasingly turn into sellers. Folks trying to protect profits will keep converting into sellers as well. These sellers will work directly against the directive from point #1. That positive gap up from the earnings surprise last October is almost certain to close now given these pressures. What happens after that is anyone's guess, but I suspect the despair in GOOG will finally reach high-pitch levels at that point. I will be compelled to look for a trade-able bounce if this happens, but I maintain $400 as the target for the year. (Click here for disclaimer).

In the meantime, check out a link to a blog article that I noticed via TraderMike. This blog article raises alarm bells about the future financial viability of search advertising when compared to display advertising and even other traditional media. It is worth a read and some serious thought! In fact, the media is now awash in Google news and opinion now. Keep an eye on the moment when the bullish voices finally get drowned out...

Be careful out there!

DrDuru, 2006