Emotions are running high on Main Street and it’s spilling over onto Wall Street. The discussions are more intense than normal regardless of topics. Sentiment over investment bias is severely bifurcated. The bulls see an easy way out of this crisis, while the bears see nothing but gloom and doom from here. Both have good reasons to stick to their stories, but I am here to tell you that somewhere in the middle lies the truth. Case in point was the price action in Microsoft (NASDAQ:MSFT) just yesterday. Microsoft stock rallied early, then collapsed into the close. This extrapolates into other tickers and some to larger degrees.
First let’s set the economic scene. Things have never been worse for the American economy and it was a self-inflicted wound. The world chose to take the harshest medicine to battle the novel coronavirus even though the negative consequences were obvious. And now governments are using the most extreme measures to combat the side effects of the medicine. While the efforts to flatten the curve were successful, the recovery from the economic malady that created is still iffy.
The exceptions are the stocks that shine during a lock down. They are mostly technology stocks, including Microsoft stock. The short bullish story is that it will benefit from the global recovery. Meanwhile, it also benefits from the shutdown.
Microsoft Stock Wins Either Way
Since people cannot meet face-to-face, business and family events migrated to the cloud. Microsoft owns a big part as it is catching up to Amazon (NASDAQ:AMZN) AWS. Microsoft Teams also competes with Zoom Video (NASDAQ:ZM). Moreover if companies are forced to work from home, then they need more Office 365 subscriptions. While stuck at home, people are also playing more games than ever. This quarantine is helping Microsoft’s stock gain momentum on many important fronts. Some of these activities will develop into ongoing habits, even after the shutdown is over. From that standpoint the stock is one to hold, especially if the investor’s time frame is long.
Management has proven itself worthy of the credit that Wall Street gives it, especially under the leadership of Satya Nadella. Consequently, it is not a cheap stock with a price-to-earnings of 31 and selling at 11 times sales. For reference, Amazon has a higher P/E, but is almost three times cheaper on price-to-sales. Value alone is not the reason to buy Microsoft stock here. But because management is firing on all cylinders, dips are buying opportunities.
Levels Do Matter
And this is where investors need to wear trader hats. To judge the quality of an entry point is to know how to read basic charts. Its price is still near its all-time highs and this is never an obvious point of entry. The first pivot zone that would qualify as one within the ascending trend is at $175 per share. This remains true for as long as the bulls are in charge of the stock market.
Otherwise, it will likely fail and produce the second best point of entry which is $10 lower near $165. Microsoft stock spiked 15% to its all-time highs from there in January. Then it crashed 30% with covid-19 and recovered all of it just after the earnings report. It’s only natural to fall back and establish a better base there.
Dips are necessary because buyers need to know that they have support. Otherwise, the rally becomes too frothy to be sustainable. During the late February crash, I said sticking with Microsoft stock was the right thing to do. Those who did got paid well into May.
This time, the stock has transferred hands several times in this unprecedented whipsaw action, so it is very possible that it still makes new highs this year. Momentum traders can also chase a new breakout even into all-time highs. While the macroeconomic conditions are horrendous, the government is throwing untold sums of money at the problem. Some of it will trickle down into the company P&Ls.
The goal is not to find the perfect entry point, but to avoid the obvious false starts. Microsoft stock is worthy of investment. The time frame should be long-term, but it’s also tradable for short-term swings. Regardless, we shared the two levels that are viable for either goals. This is not a stock to short without technical reason. It is most important to shed any emotions, while investing in it especially now.