Last time I wrote about Microsoft (NASDAQ:MSFT) stock was to share the opportunity in owning it into 2020. What followed was a rip-roaring 25% rally.
Recently we’ve seen some red and the Monday open was a big whoosh like we rarely see. In fact it was the third-worst Dow Jones drop in history.
Let’s keep things simple. They say in a bullish market, buying the dip makes sense. Well this is as bad a dip as you’re likely to get, so it should eventually be a buying opportunity. In reality it’s a little more complicated, so let’s discuss the opportunity for Microsoft stock.
The correction that equities suffered yesterday brought Microsoft back close to the $160 neckline. The drop was painful for new longs, and it probably felt worse for those watching the experts in the media panic on Monday. They tend to scare people out of positions in a knee-jerk reaction.
Near pivots like the $160 per share level is not usually a place to give up on a long position. Necklines tend to be supports on the way down. So those long should wait out the shake out another day unless their thesis is broken. Under the leadership of CEO Satya Nadella, Microsoft has been on rails and deserves a little faith.
Microsoft Stock Showing Resilience In the Face of Adversity
After yesterday’s debacle, the stock managed to close above $170 per share which is interesting because that is the 50% Fibonacci retracement from the December breakout.
Dips happen, and when they do they are not always a reason to panic. In fact, this rally came too fast, so the profits were in the hands of recent owners. These are weak hands and they are quick to hit the sell buttons. The dips are necessary to shake them out and transition the stock into the hands of new investors who missed it the first time around in December or January.
This is the opposite of “FOMO,” or fear of missing out. It is human nature to panic out of positions, just like we tend to want to panic-buy runaway rallies.
This doesn’t mean that the stock cannot fall any further from here. But dips into prior pivots are buy-able. The goal of investing is not to find absolute perfect entry points. The point is to avoid obvious mistakes, because over time we know that quality stocks will appreciate. So investors who do proper homework to find a good thesis like the one in Microsoft take advantage of on dips.
Given that we are still only a stone’s throw away from the all-time high on Wall Street, it makes sense to exercise patience and enter positions in smaller increments. After all the CBOE Volatility Index (VIX) spiked 45% on Monday, and that deserves respect regardless of how solid the individual thesis is for stocks. If the indices continue falling, it will be hard for any stock to hold on its own.
Nothing has really changed fundamentally because we still have very accommodative global Central Banks. This is different from 2018, when Jerome Powell scared investors into thinking that the U.S. Federal Reserve was going to continue raising rates. So given that this time it’s different, this tizzy too shall pass. The pundits are scared of saying so, but they are often wrong because they tend to form consensus too late and hang on to it too long.
It Is Important to Do Homework
Investors need to form opinions based on personal research, and then evaluate those opinions against what they read. It is dangerous to simply chase a headline blindly without due diligence. Every investor now has a whole variety of tools at their fingertips thanks to the internet. It just takes a little bit of time and practice.
Simple is good and in this case Microsoft stock is not bloated. The company will continue to make money at the same rate for the foreseeable future. The coronavirus will cause a hiccup in the global GDP, but that was also the case two weeks ago. The difference now is that the matter is littering the ticker tapes, propagating fear.
So in the end, it comes down to two main questions that trouble investors on big red days. The first is: Do I panic out of my stock? No, unless the reason I entered it in the first place is now gone. The second is: Can the stock go lower from here or is this a good time to buy Microsoft stock? Yes, it can go lower because nothing is guaranteed and support zones are rubber bands. This stock is not a bargain, so there is more froth to shed on bad days. It sells at roughly 30 price-to-earnings ratio and a whopping 10x sales. So when in doubt, I wait out a few ticks or at worst take a partial position just to relieve the itch jumping in too soon. This way I leave room to manage the risk in case the selling persists.
My message last year was about the same as now, only at vastly different levels. Back then we were discussing support levels under $150 per share, so that speaks to the size of the rally it has had.
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. Join his live chat room for free here.
