Microsoft Stock Is Boss, But it Would Be Even Better Lower

The stock market closed last week on a red note. The indices fell about 1% to close out a red week, but not for the Nasdaq. Stocks like Microsoft (NASDAQ:MSFT) did better than the rest. MSFT stock is one tick away from an all-time high.

Source: VDB Photos / Shutterstock.com

In fact, on Friday, it was higher than its prior closing high. Even though the stock has been on a tear, there isn’t extreme froth in it. That’s because management has been on point since Satya Nadella took over as CEO. Investors are reaping the rewards of a great adaptation strategy.

Microsoft grew its revenues 70% in the last four years and doubled its net income. These are impressive statistics that somewhat justify the price action. I said “somewhat” on purpose because I am cautious up here.

My reason for this is more extrinsic than Microsoft specific. I am confident that they will continue to fire on all cylinders. My concerns stem from the next six months of macroeconomic conditions.

MSFT Stock and the Economy

We have had QE and stimulus programs running so long and so strong that I expect a let down. This patient has been on the heaviest drugs available, and getting off them is going to be painful. The economy is doing very well thanks in large part to government aid.

First, the Federal Reserve is providing extreme liquidity. Their asset repurchase programs infuse $1.4 trillion a year. Second, the White House is tripling that in direct aid to its citizens. These measures are ending and the stock market will miss their impact.

In addition, we are in a weird inflation scenario. We all know that everything is more expensive than it’s ever been. Yet the CPI says otherwise, and the Fed is calling it transitory. I fear that there is something more sinister lurking. I don’t want to repeat the blindside of 2008, so it’s best to prep a bit.

A Look at MSFT’s Chart

Microsoft (MSFT) Stock Price Showing Extended Rally
Source: Charts by TradingView

My forecast is that there will be a spending crimp going into 2022. If I am right, the indices should suffer and MSFT stock will have to work within that. The rising wedge that it has delivered since the pandemic bottom is very steep. It is up almost 100% since then and 210% from 2018. Even though I am confident of the fundamental reasons it is up here, I am leery about the technical setup.

When stocks breakout they often revisit prior necklines. In this case, it has three different major pivot zones. None of them would look pretty if they come to fruition.

For the short term, I acknowledge the remaining potential upside. In the last six months, MSFT stock has had 15% rallies. Each faded half way before launching the next rally. This third one is still ongoing and could have another 6% left in it. Investors buying shares in size must be more confident about their timeline than I am.

A Matter of Timing for MSFT Stock

I understand the traditional long-term perspective, but that logic goes both ways. Patient investors often say that they aren’t trying to time entries. If so, then what’s the harm and waiting out a few ticks higher or lower?

Call me crazy, but I’d rather start out on a positive note than to buy a top.

MSFT stock has many strong support levels between here and the 2020 lows. I see buyers lurking in near $238 and $225 per share. Below that there is an even stronger consolidation zone through $200 per share. This stock would be a great buy if it goes there. The only scenario I have for that is if the whole market corrects.

Meanwhile, it is imperative to take positions in tranches. Conviction should be lower than normal when the stock markets are this high. Being patient is prudent even if it means missing on some upside potential. In the long term, it works out better if we made smaller mistakes.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Nicolas Chahine is the managing director of SellSpreads.com.


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