Security, political and technical threats are hanging over Microsoft (NASDAQ:MSFT) out-the-gate in 2021. But for investors the big picture suggests opportunity may be knocking rather than longer-term bearish intruders. Let’s take a look at what’s happening off and on the price chart of Microsoft stock and offer a risk-adjusted determination of how to position aligned with those findings.
It’s been a less-than-terrific start to the new year for Microsoft shareholders. Following 2020’s strong rally of 43% to record highs, MSFT has given back just over 4.5% in less than a week. The pressure appears to have a couple factors at play.
Earlier this week investors reacted bearishly to an update from Microsoft regarding December’s SolarWinds (NYSE:SWI) cyberattack of U.S. government networks. The company announced some of its closely-guarded source code were accessed as part of the hack.
Along with broader market worries surrounding Covid-19 cases, MSFT shares spilled lower by more than 2%.
But it was Wednesday’s ballot box favoring a win for Democrats in the Senate that found Microsoft and many large-cap tech unceremoniously turning back the clock by a couple weeks on stock prices. The specter of raised antitrust action and government interference weighed on the group. The possibility of higher corporate taxes also helped drag stocks lower.
Broker Wedbush chimed in stating it expects “much more scrutiny and sharper teeth” against Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOGL) with Democrats in control of Congress. And while Microsoft isn’t in the crosshairs of regulators, the motion to dismiss the 50-day simple moving average as a key witness for the MSFT defense was repealed.
Microsoft Stock Weekly Price Chart
Source: Charts by TradingView
To be certain, it’s a bearish news cycle at the moment for Microsoft. As indicated, investors aren’t standing idly by. But another challenge today is a richly-priced market and Microsoft’s price multiple expansion the past few years. Shares fetch 33x earnings. That’s roughly 65% more than what Microsoft cost in 2016 when shares traded at a price multiple of 20x.
Still, the Microsoft story has changed decidedly for the better.
Today’s successful rebooted growth engine, spearheaded by Microsoft’s cloud business, shows no signs of slowing. And an up-and-coming area like artificial intelligence offers to enhance the company’s reach in the coming years. Mindfully, during that leaner era which investors now reflect back on and call ‘cheap,’ the reality was very different. Microsoft was widely regarded as an old tech anachronism with no chance for growth. It traded at 20x earnings because there was little under the hood to be excited about.
Regarding Microsoft stock’s technical picture, Wednesday’s decline saw the 50-SMA, a favorite of institutional investors, fall to the wayside. It could be a sign harder times are upon investors.
The past several sessions have also changed the pattern characteristics of MSFT. An interpreted bullish irregular double-bottom base now has a more triangular shape to it. The subtle shift could also be hinting more bearish challenges lay ahead. But let’s not put the cart before the horse.
Most important to a still-pertinent bull case, Microsoft remains inside triangle support. Along with its healthy six months of corrective price activity and today’s oversold monthly stochastics setup, a breakout above pattern resistance confirmed by a bullish crossover would send a powerful intermediate-term buy signal for investors.
For now, I’d suggest monitoring MSFT stock from the sidelines. In the coming weeks if Microsoft can be picked up with the benefit of the price confirmation described above, a March collar to hedge the position would be a favored way to gain initial exposure to shares.
Bottom-line, trends can persist for much longer than most of us give them credit for. Even expensive-looking ones like MSFT. But in the event the music stops, knowing your real stock risk in advance and having it guaranteed with a collar strategy is smart business for investors inside and beyond Covid-19.
On the date of publication, Chris Tyler does not hold, directly or indirectly, positions in any securities mentioned in this article.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.