Microsoft Corporation (NASDAQ:MSFT) reported earnings last Wednesday, and though the stock dropped ahead of its report, it is higher-than-ever now.
Concerns about the economic impact of the Wuhan coronavirus are becoming more of an issue for the market than most analysts had expected, and Chinese stocks have been selling off.
If you look at the chart of the Shanghai Composite Index below, you can see that the index of Chinese stocks dropped below its August support levels.
Daily Chart of Shanghai Composite Index — Chart Source: TradingView
The Shanghai Stock Exchange closed for the celebration of the Lunar New Year, and in that time, the markets started dealing with increased concern about the coronavirus. When Chinese investors came back last Friday, it was the first chance they had to react to this problem.
Although we haven’t seen much of an impact from that selling in North American markets, we will probably still see some reverberations later this week. Because of that uncertainty and the volatility last week, we want to stick with large-cap tech and retail stocks for now.
Selling a put write on MSFT would be a great way to collect income while we wait for the market to settle down.
The All-Important Cloud
MSFT’s earnings were exceptionally strong. It beat earnings expectations by $0.19 per share and revenue expectations by $1.23 billion — coming in at $1.51 per share and $36.9 billion respectively.
Its cloud and subscription business had an excellent quarter, and that is exactly where investors want to see big numbers. According to Business Insider, the sales for the company’s commercial cloud business grew by 39% year-over-year.
Average profit margins are in decline, and this usually makes MSFT more popular among big investors. They will overbalance their large portfolios in favor of the stock — and those few others like it — to capitalize on the shrinking pool of stocks with reliable profit growth.
The net effect of that capital flow should keep the stock rising or at the least, above support.
Right before MSFT reported earnings, the stock hit resistance at $167.50. Then it dropped, on Jan. 27, possibly because investors wanted to take profits off the table before MSFT reported. The stock found support at $160 and pushed higher, closing above its old resistance on Jan. 29 — the day the company reported earnings.
Daily Chart of Microsoft Corporation (MSFT) — Chart Source: TradingView
From there, the stock jumped above $170. We believe the $167.50 resistance level will serve as support going forward, which makes it an excellent strike price for a put write.
From a technical perspective, MSFT’s trend is very strong, and its fundamentals back up its recent rise. We think the stock will remain elevated while the market deals with the election and coronavirus risks, but we wouldn’t recommend taking on a trade that lasts longer than one month.
If you plan on selling a put write, we recommend early March expirations.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.