In mid July Google reported Q2 results that exceeded most estimates showing strong revenue growth of 27% year over year, its largest quarterly gain in almost 3 years as the company saw a greater than usual contribution from Google Websites (such as YouTube). At the same time earnings fell a tad below estimates in the quarter with greater than expected capex and tax rate coupled with the largest quarterly headcount increase (in a quarter where no acquisition closed) in two years.
Despite the stock’s rise of 4% the day following the results (July 18th) the stock has lost a bit of momentum and is actually down since:
What’s interesting about this is the Nasdaq 100 (QQQ), of which Google makes up about 8% of the entire index is up about 90 bps in the same time period:
While this divergence is anything but extreme, it is notable in a market that is starting to see increasing correlations, especially in large cap tech stocks which have been market leaders in the latest leg of the bull run.
Taking a bit of a long term view, the stock has doubled over the last 2 years from the July 2012 lows and with the recent test of the uptrend that has been in place for two years the stock could be setting up for a fairly important test. And momentum could be waning:
A break below the uptrend would mean a quick break to support at $550, with the next level of major support being $500, the level the stock gapped to back in October after Q3 earnings:
I would add one more thing, for those looking to pick a top in market leader Google, it is been a painful endeavor. And while the path of least resistance for the broad market still feels UP it is important to keep an eye on some of the horses that got us here, as declining momentum in a market that has shown fairly narrow breadth could signal more volatile times to come.
For those long and strong protection looks fairly reasonable as the chart of 30 day at the money implied vol (the price of options) vs 30 day at the money realized vol (how much the stock is moving) is basically inline with one another which often occurs after a large move in the stock as options prices decline and the stock settles into a range:
With the stock attempting to break above its recent consolidation today but having difficulty any down days from here are likely to take the stock towards the 550 level and towards the bottom of its consolidation. But with no major catalysts in the near term trade structures should look to play for that move with litter or no premium risk and even with implied volatility down recently it’s probably still high enough that short premium strategies with an eye towards $550 would be the best bet for mildly bearish views.