Through TheFly's Eyes: Google Inc.
from Theflyonthewall.com







After the market close yesterday, Google (GOOG) was added to the S&P 500 index to replace Burlington Resources (BR), which is being acquired by ConocoPhillips (COP). The addition follows months of speculation and anticipation that Google would make the index. S&P spokesman David Guarino said, “Based on the calendar of publicly announced deals, this was the best time to make the addition. The stock price wasn't a factor in our decision.”

The news of the S&P addition, which will increase Google’s broad ownership, was greeted favorably by the Street. This morning Stifel Nicolaus & Company upgraded Google to a Buy from a Hold, a rating they held on the company since they upgraded it from a Sell on February 26. Jefferies & Company maintains their Buy rating on the search engine giant, saying this should create a positive momentum swing for both Google and the sector.

On a broader scale, the announcement represents, to paraphrase Charles Dickens, “A little of the best of times, and a little of the worst of times,” for investors. On the upside, the Google news sparked a modest rally in the search engine sector at mid-day Friday: Google was up $26.47 to $368.17, Yahoo! (YHOO) was up 30c to $32.15, and Microsoft (MSFT) was up 4 cents up $26.90. Further, there was talk around Wall Street that Google could spark a broader rally across sectors - a tech/networking/Internet rally extending deep into the spring. Moreover, many tech industry watchers viewed the S&P inclusion as further confirmation of Google’s unique business model and way of conducting business – something that could reflect positively on Google’s companion companies. On the downside, traders and S&P watchers expressed concern about possible increased S&P 500 Index volatility stemming from the Google inclusion. While Google gives every indication of fundamental value and that the company will be around for a long time, Google’s cache and charisma bring with it speculation and froth – two realities that complicate the trade equation, particularly technical-based trades. In addition, others were concerned about the S&P 500 Index comparability over time. As one economist put it best, “Every time you try to make an index more-reflective of the current field of companies, you risk decreasing comparability to the previous S&P 500 Index.” Therefore, traders and analysts will be watching the S&P index and Google closely in the months ahead, to see if Google blends in inconspicuously, or blends in with a bang.

Our Options strategist notes that Google’s April option implied volatility of 42 prior to the S&P addition is near its 26-week average, which suggests non-directional price fluctuations.

Our Technical analyst notes that the stock has moved up about 8% today. He sees some interesting technical factors and a more quantitative one - that the stock will need to be purchased before or on that day by funds that track the S&P 500 and therefore need to own it. Let's deal with that last factor first. One estimate suggests that some 7.3 billion dollars of the stock will need to be purchased by fund managers. Although that may seem like a lot of money it works out to about 2 days of normal trading volume in the shares. That certainly has the capacity to impact prices in the short run and that is what we are seeing happen today. Traders have "discounted" that event and priced the stock accordingly.

On a purely technical basis the stock is still in a downtrend despite the pop in price. In fact until yesterday it was trading inside two bearish price channels that intersected (see chart). That is not a positive going forward unless it can clear both and it has a ways to go before that happens. It is interesting to note the two price channels and the 30-day moving average happened to intersect yesterday. That may prove to be a very important area for a future test - more bullish if it can stay above that level. There is another intersection on the chart to keep an eye on at $387.87. That is where the uptrend line and the current bearish price channel intersect and could prove to be very strong resistance

Resistance, the level at which a stock may have trouble moving above, is today at $370.09 (high so far today), then at $377.43, the 50 day moving average at $381.48 and then the upper limit of the current bearish channel which is today at $389.68. It would need to break above that level to change the bearish trend. Note that the channel slopes downward making it easier to break above this level over time, but the uptrend line moves away in the opposite direction (making it progressively more difficult over time for the stock's general direction to be perceived as being in an uptrend, hence bearish).

Support levels for Google are a tougher matter. The stock has moved so erratically in price that there is very little established support (levels that have been tested in the past) near where it is trading today. We can use the low today as the first support, $363.00 (and the closing high presuming it is above here by end of day). Next support would be at the midpoint of the current channel at $357.57 (near the 30 day moving average at $356) and then the traditionally important 200-day moving average at $348.94 (in this case tracks the uptrend line very closely).

Chart created with Equis MetaStock