So far, 2019 has been much better than the end of 2018. Except that this week, equity markets are starting to feel like the markets of last December. But what’s at the heart of my bullish thesis on Microsoft (NASDAQ:MSFT) today is that this time it’s different!
This market swoon is not like the one from last year because this time we have the U.S. Federal Reserve as a friend, not a foe. Last year, Fed Chairman Jerome Powell made the mistake of saying that their interest rate hike cycle was on cruise control. Since then, they have reversed course. Now they are more likely to cut rates than raise them.
At the heart of yesterday’s dip is the notion that the yield curve is inverting. This is something that the Federal Reserve can remedy. So the fears here are not realistic, and good stocks like Microsoft have upside still left in them.
How to Trade MSFT Stock
When my overall thesis is bullish but the markets are falling, I build a shopping list of good stocks to buy. MSFT makes the cut almost every time, and here it’s no different. It it important to note that we are still pretty close to all-time highs in the market, and in Microsoft stock some more downside is possible but the bottom is limited.
So my overall assumption is that these headlines are more about media trying to drum up readership than actual concerns over the fundamentals. This too shall pass and we will resume higher to set new highs this year.
MSFT stock is a stock that I would gladly hold for the long term. Microsoft management has proven itself worthy. They’ve survived through every test including the dot-com bubble. So this skirmish here is not going to be different.
Under the leadership of CEO Satya Nadella, they are making all the right moves. They finally steered the ship into the new tech world of subscription revenue. They ended the old ways of standalone version selling that was riddled with piracy. So now the profit and loss statement is more consistent so they can build on future technologies to come.
For the short term, the media will continue to push inflammatory headlines down Wall Street’s throat and influence unnecessary price gyrations from the fears they create. So there are important lines to know.
In March, MSFT stock made a leap higher from the $115 per share zone, so that becomes the neckline to watch for support in case the selling persists here. But there is a lot of room between current levels and that pivot point.
The stock also has an important interim area around $2.50 above or below $120 per share. These served as mini-ledges that should also be support on the way down. The bulls will test them for footing before using them as a launch pad for higher highs.
The action above $122.50 has been volatile. The bulls spiked to new highs on the earnings report twice, but both times they faded the moves and are now back at the same base.
So if the markets in general stop falling here, then the odds are that MSFT stock will push higher again. This time it could burst to new highs. Conversely, if the selling lingers longer, then Microsoft is vulnerable at this neckline. Below $122.50, it could target the prior levels we noted earlier.
So from a trading perspective, we all know that they don’t ring bells for perfect entry points into stocks. So while we are still in danger of geopolitical headline mode, we can be cautious and start setting up entries into names like Microsoft stock.
Those who are interested in owning the shares for the long term there is no sense of trying be surgical here. For those more active traders they can nibble with a starter position or use the options markets.
Instead of buying the shares, those who want to own shares can sell the Oct $105 put and collect $1.75 per contract. I don’t even need a rally to win. As long as the price stays above $105 then I win. Otherwise I own the shares and lose money below $103.25 per share. Compare this with being long Microsoft stock from right here with no buffer.
Calling for new highs at these altitudes — up 23% year to date — sounds gluttonous, but in reality MSFT valuation is reasonable. It sells at a 28 trailing price to earnings ratio for the trailing 12 months. So this is based on actual results not speculation. This is also in line with Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL
) and Facebook (NASDAQ:FB). MSFT is not a momo stock like Salesforce.com (NYSE:CRM) or Adobe (NASDAQ:ADBE), which have a 107 and 51 trailing P/E’s respectively.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can join his live chat room here.
