Show Me, Google

By Dr. Duru written for One-Twenty

April 28, 2007

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One again, Google (GOOG) put out a stellar earnings report, and again the market essentially yawned. After GOOG's last earnings report, I noted that it now seemed to make more sense to sell options rather than buy them if you want to gunsling in advance of GOOG's reports. GOOG gapped up "only" 3.8% at the open on April 20 and was practically all downhill from there for a 2.3% close. Such small moves mean that only in-the-money calls will make money and all puts will lose a lot of money. For options sellers, it was like shooting fish in a barrell!

The big problem for GOOG now is that market expectations are clearly very high. The downside risks are growing more and more every week relative to the upside potential. This is not to say that GOOG has permanently topped out. I am saying that at this rate, GOOG is much more likely to experience a sizeable correction before it makes significantly more progress to the upside. If you have any doubt that market expectations remain high for GOOG's stock, check out where the stock is now:
  1. While the QQQQ and the NASDAQ have made new highs on the year, GOOG is still below the high it made once tested twice unsuccessfully in the past five months.
  2. When the NASDAQ sprinted to a new high with almost a 1% gain on April 27, GOOG buyers couldn't care less...the stock ended the day essentially unchanged.
  3. GOOG is currently around the same price it was at the old high made on January 11, 2006.
  4. In fact, since that high of $471 made in January 2006, GOOG has spent 247 of 324 (76%) trading days below that high.
This is not a particularly strong endorsement of a company that is supposed to be taking over the internet. In the 6 trading days since the last earnings report, GOOG essentially closed the post-earnings gap. This negates whatever good news those earnings were supposed to represent. The stock is right back into "show me" mode.

And, now, having said all that, I will point out that the technical picture on GOOG does not look too bad in the short-term. Despite the fact that it negated the upside gap from earnings, it is still in a short-term up-trend. The chart below shows that volume has quickly died back down after earnings and stochastics are close enough to flashing a buy signal. GOOG is back above the 50 and 200DMAs and both supports are now turning upward. The big technical negative is that OBV has not yet recovered. I did not show it here, but OBV has been in decline all year.

Be careful out there!


DR. DURU®, 2007