Trends can sometimes persist longer than most of us would ever believe imaginable. But all trends do also end. And right now Microsoft (NASDAQ:MSFT) stock is showing certain signs a more bearish phase is making its entrance on the price chart. Let me explain.
Over the past few years it’s no secret Microsoft has reinvented itself into a software-as-a-service and cloud-based powerhouse. It’s also common knowledge shares have benefited immensely from that success. What I’ve previously coined a “Version 2.0” reboot has allowed Microsoft to climb nearly 375% since breaking out and clearing 1999’s all-time-high in 2014. Nice right? But it gets better.
The run in Microsoft shares has also compared very favorably to the large-capitalization S&P 500 and technology-based Nasdaq Composite. In fact, its rally is more than five-fold the former’s gain of about 71%. And it’s roughly 2.5 times the tech-heavy index’s impressive increase of 142%. But there’s even more to today’s MSFT shares.
Microsoft’s $1 Trillion Peers
The stock’s performance during Version 2.0 has allowed Microsoft to be one of just two companies — the other Apple (NASDAQ:AAPL) — that’s toppled the once elusive $1 trillion market capitalization threshold. As of Friday’s close shares commanded a $1.36 trillion valuation. And Apple holds only the slimmest of leads with its worth of $1.37 trillion.
It would be unfair not to mention Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). Each of those tech giants have also recently cleared this barrier. But both companies’ shares are also clinging to remain in this exclusive club with market caps of $1.04 and $1.02 trillion respectively. It’s a far cry from Microsoft’s 36% premium to the benchmark.
The point is that times have been very good for Microsoft shareholders. Maybe too good. And while one day doesn’t make a trend, Friday’s unusually menacing 3.2% loss should serve as a warning. Further, with mounting evidence on the price chart of a larger corrective phase, it’s time to take action.
Microsoft Stock Monthly Price Chart
It’s unavoidable. Even the best price trends eventually face a technical reset in the form of corrective price action. Corrections aren’t phases which can be conveniently and definitively qualified. Still, when looking at the longer-term monthly chart of Microsoft, there’s little denying that shares are aggressively priced.
Technically, February’s rally has shot Microsoft into an overbought condition unlike any we’ve seen — other than possibly one or two months during the dot-com bubble. A combination of shares well-extended outside the upper Bollinger band, extreme stochastics positioning and price action hitting a handful of Fibonacci extension levels dating as far back as the financial crisis is problematic. Cumulatively, they’re very real warning signs Microsoft has come too far, too fast.
So, what does this mean? If you’re in Microsoft it’s time to take profits as the path of least resistance is likely lower. And when I say lower, I’m not simply looking for shares to drop for a day or two or only for as long as the coronavirus is headline news. I’m expecting a radically lower share price for MSFT before all is said and done.
Making the Trade
The first meaningful cluster of technical support doesn’t come into play until roughly $130-$141. A move of that size works out to a correction of 25%-31%. It’s a larger correction for a stock of Microsoft’s stature, but far from out of the question. In fact, declines of up to 30% in growth stocks during healthy markets are common. What’s more, in lesser investing environments, it could get uglier. Apple stock’s punishing decline of 39% in the fourth quarter of 2018 is proof of that.
Given the circumstances it would be more foolish to disregard the possibility of a larger correction in Microsoft stock. Moreover, with February quickly taking the shape of a volatile topping candle, even bears might consider sinking their teeth into a more challenging MSFT Version 3.0.
Investment accounts under Christopher Tyler’s management do not currently own positions in securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
