Google Stock: Growing Pains
For years now, bad economic news has been interpreted as good news for the stock market. These poor economic numbers have translated into easier monetary conditions and have reinforced a low-interest-rate environment.
Investments like Alphabet Inc (NASDAQ:GOOG) stock, otherwise known as Google stock, do well under such conditions because investors seek growth in a low-interest-rate environment and, as a result, growth companies warrant having high valuations.
The dynamic of the financial markets started to change in early fall as interest rates started to rise. This move higher in interest rates accelerated after Donald Trump won the presidential election. Equity markets were cheering on the prospects of the new president-elect, and it was contrary to what the media and pundits had us believe would occur if he won.
Markets have soared to all-time highs, and bullish records have been shattered, but all this euphoric equity market action is overshadowing the fact that the bond market has had its worst performance in years. When bonds sell off, yields rise.
This is why Google stock has been left out of the “Make America Great Again” rally; higher interest rates are not favorable nor beneficial to growth stocks.
This price action is becoming concerning and, if interest rates are going to continue to rise, then growth stocks are going to continue to get pressured lower.
I believe that growth stocks are now at that point in time at which, if a rally does not take share prices higher, a tidal wave of selling could begin and overwhelm this sector.
Why do I believe this? It is because GOOG stock is testing an important trend line. It is a trend line so important and so relevant that falling below it would set off a cascading effect. I cannot even begin to describe how important it is that the Google stock price remains above this trend line.
The following Google stock chart illustrates the trend line that I am referring to.
Chart courtesy of StockCharts.com
The Google stock chart above illustrates the uptrend that has supported the price since GOOG stock first went public in 2004. The uptrend is created by connecting the troughs on the price chart using a trend line. This trend line symbolizes the entire bull market in Google stock; a bull market that has traveled from the bottom left to the upper right on the price chart.
GOOG stock has never traded below this trend line, but it has tested it on numerous occasions. Every time this trend line was tested, buyers were eager to step in and buy GOOG stock. Failing to hold this trend line would mean that the bull market in Google stock that began over a decade ago is complete and, I hate to say it, but it will suggest that a bear market has begun.
This trend line currently coincides with another level of support, as illustrated on the Google stock chart below.
Chart courtesy of StockCharts.com
As Google stock has been bouncing off of trend line support, it is also battling the 200-day moving average. The 200-day moving average is the dividing line between stocks trading in a bull market versus stocks trading in a bear market. When the share price is above the moving average, it is bullish. When the share price is below the moving average, it is bearish.
The bulls will argue that there are two levels of support coinciding around one price and, as a result, support will hold. On the other hand, the bears will be arguing that a failed breakout occurred in October, and that lower lows have established a downtrend which increases the odds that support will fail.
One camp will soon be declared the winner, and the price will dictate what happens next. I am concerned what a break of this trend line would mean for the entire growth sector.
Bottom Line on GOOG Stock
Google stock is testing an incredibly important level of support, and I am concerned that this level of support may not hold. Under such circumstances, I have always found it wise to use the appropriate tools to reduce my risks and lower my concerns.