Lofty Heights

02/09/2007 12:00 am EST

Focus:

Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

How long can it go on? Technical and options pro Bernie Schaeffer analyzes the bullish support behind the stratospheric rise of Google's shares and ponders its fate after the company's announcement of its third-quarter earnings...

"Google (GOOG NASDAQ GS) will report third-quarter earnings after the close (analysts are expecting $2.60 per share; the whisper number calls for $2.94 per share). Editor's note: GOOG's profit nearly doubled, to $2.62 per share, excluding one-time items.

"The equity's backdrop strikes me as one of very high expectations. Options players are bullishly-positioned, short sellers have left the building, and even the media is optimistic. The stock's Schaeffer's put/call open interest ratio (SOIR) has been in decline mode since January options expiration. The indicator currently weighs in at 0.57 (in the ninth annual percentile). According to research from Joe Sunderman, this is the lowest it's been ahead of GOOG earnings reports dating back to February 2005.

"What really strikes me here is the February open-interest configuration. And it's not just the "wall of calls" at the 500 strike and above. It is the fact that, in the front-month series, puts do not begin to exceed calls until the 460 strike. According to Power Options, the skew is minor, with an implied volatility of -47 percent for the 450 put and 44 percent for the 540 call. In short, the options landscape is very bullishly-positioned.

"Short interest accounts for about 2.6% of the equity's float; the resultant short-interest ratio of 1.07 offers little chance of any positive impact from short-covering activity. The number of shorted GOOG shares (5.8 million) is at its lowest point since May 2006. Finally, analysts are almost unanimous in their bullish support of GOOG. The latest Zacks data reveal 13 "strong buys," four "buys," one "hold," and not a "sell" to be found. That's an awful lot of downgrade potential.

"Checking on technicals, GOOG is above all of its major moving averages and is near its all-time high. But going back to late November, the stock hasn't shown a great deal of conviction with regard to the psychologically significant $500 level and hasn't made much headway at all for roughly two months. GOOG needs a modest wall of worry to help strengthen its resolve in this area, not a backdrop of optimism that could crumble at the slightest nugget of negative news.

"If the stock should begin to retreat, its 80-week moving average, which coincides with the 400 level, looks like strong support. Caveat: GOOG is one of a special breed of heavily followed stocks that is typically tough to trade, especially on a short-term basis."

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