PUT THIS NEWS SHORT ON GOOGLE IN A TIME CAPSULE
(And Look at Its Chart)

There was a paragraph posted on Yahoo Finance Wednesday morning that summarizes accurately the dominant mood moving today’s stock market. This short is relevant from many perspectives to stock market cynics. While William O’Neill accurately stated that he never met a successful cynic, it may be relevant to read this paragraph carefully, print it out, and place it in a time capsule. There will be a time to get it out and read it again when the eventual and inevitable reversion to the mean of stock market valuation occurs. The cast of characters, subject matter, and quotation are what makes this short a pure slice of today’s stock market sentiment. Here it is:

“Wednesday, December 13, 2006
Harold Maass] NEWS AT A GLANCE

Google plays the market

Google plans to help employees make the most of their stock options by selling them through an online auction. The system will make it clear how much financial institutions think the options are worth, which could be more than the current share price if Wall Street expects the stock to rise. (AP in Yahoo! Finance) "There's been a huge debate as to whether stock options have value," said Arthur Levitt, former Securities and Exchange Commission chairman and senior adviser at the Carlyle Group, "and this settles that debate for me, personally." (The Washington Post, free registration required)”

Aside from this news, the chart of Google is probably as good an indicator as to the intermediate term technical position of the overall market as any. At a current market capitalization of about $146 billion, Google now sports a market capitalization that is greater than that of IBM and more than that of Boeing and Disney combined. There are numerous fundamentally based rationales from Wall Street as to why Google should sport such a generous valuation; yet regardless of the rationale used, they all sound like late 1990’s bubble talk. All of these rationales are based upon unrealistic long term earnings growth rates. Generally speaking, they take the one-year projected earnings growth rate of more than 30% and project it out for an unrealistic time frame of 5 years or more. To put this growth rate in perspective, 30% growth per year compounded over 5 years results in total growth of about 370%. The point is, divorced from any reasonable basis, the market price of Google shares as it trades today is simply an indicator of current positive market sentiment. Watching the market action in Google is relevant because it gives the analyst a window as to how the market feels. There are some early, yet not definitive indicators (described below) that suggest this positive sentiment may be beginning to turn for the worse.

The long term weekly chart of GOOG shows some key technical features. The most important of these is the current level of the stock – 479 – is approximately equal to the New Year's 2006 former top. The area of the blue horizontal line is potential support. Simply stated, if support holds, it would be bullish; and if it doesn’t, it would be bearish. The bearish break of support would be intensified by Google’s failure to hold a former all-time high.

Another less important feature is momentum – in this case the weekly price percentage oscillator (PPO). Other weekly momentum indicators show similar momentum loss characteristics. While the momentum loss is potentially bearish, momentum is only momentum and has to be confirmed by actual price action.

Finally, the volume trend is indicating a diminishing amount of trading volume. If the support line at about 475 is decisively broken, and this occurs on higher than average volume, this would lend further bearish confirmation to the support break. It just deserves attention at this point – not action.

Similar to the weekly chart above, the point-and-figure (PAF) chart shows GOOG sitting right on support. A move to below 476 would represent a triple bottom breakdown. If this were to occur, it would be bearish; yet until (and if) this occurs, the PAF chart remains bullish.

Similar to the weekly, the daily chart shows a loss of daily momentum, yet no key support levels have been violated. It is notable that this week prices dropped marginally while trading volume intensified, albeit on generally unremarkable absolute levels. This same bearish price/volume characteristic is also illustrated in the Chaikin Money Flow (CMF) indicator.

Note much can be gleaned from the 4-day, 10-minute chart, except that Google is in a short term downtrend. This chart is updated in Today’s Market, below.

In summary, Google, which is an important indicator of overall market sentiment, is at a key technical support level while it is showing negative momentum and bearish volume/price tendencies. A decisive break of support confirmed with volume would be bearish in the intermediate term for Google as well as the overall market.