Emotions are running high on Main Street and spilling over onto Wall Street. The discussions are more intense than normal, whatever the topics. Sentiment on the investment bias is sharply divided. Bulls see an easy way out of this crisis, while bears see nothing but gloom and doom from here. Both have good reason to stick to their stories, but I’m here to tell you that somewhere in the middle lies the truth. For example, the price action in Microsoft (NASDAQ:MSFT) just yesterday. Microsoft stock rallied early, then crashed at the close. This extrapolates into other tickers and some to higher degrees.
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First, let’s set the economic scene. Things have never been worse for the US economy and it was a self-inflicted wound. The world chose to take the harshest drugs to fight the new coronavirus, even though the negative consequences were obvious. And now governments are using the most extreme measures to combat drug side effects. While efforts to flatten the curve have been successful, the resulting recovery from economic disease is still uncertain.
The exceptions are stocks that shine during a lockdown. These are mostly technology stocks, including Microsoft stocks. The bullish story is that it will benefit from the global recovery. In the meantime, he is also enjoying the stoppage.
Microsoft Stock wins anyway
Since people can’t meet in person, work and family events have migrated to the cloud. Microsoft holds a large share as it catches up Amazon (NASDAQ:AMZN)AWS. Microsoft Teams also competes with Enlarge video (NASDAQ:ZM). Plus, if businesses are forced to work from home, 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 become permanent habits, even after the shutdown ends. From this point of view, the action is to be kept, especially if the investor’s time frame is long.
Management has shown itself to be worthy of the credit given to it by Wall Street, particularly under the leadership of Satya Nadella. Therefore, it is not a cheap stock with a price to earnings ratio of 31 and selling at 11 times sales. For reference, Amazon has a higher P/E, but is almost three times cheaper on the price-to-sales ratio. Value alone is not the reason to buy Microsoft stock here. But because management is firing on all cylinders, dips are buying opportunities.
Levels Matter
Source: Trading by TradingView
And this is where investors should wear trader hats. Judging the quality of an entry point is knowing how to read the basic maps. Its price is always close to its all-time highs and it is never an obvious entry point. The first pivot zone that would be considered one in the uptrend is at $175 per share. This remains true as long as the bulls are in charge of the stock market.
Otherwise, it will likely fail and produce the second best entry point which is $10 lower at nearly $165. Microsoft stock soared 15% to all-time highs from there in January. Then he crashed 30% with covid-19 and recovered everything right after the earnings report. It is natural to withdraw and establish a better base there.
Dips are necessary because buyers need to know they have support. Otherwise, the rally becomes too frothy to be sustainable. During the late February crash, I said sticking with Microsoft stocks was the right thing to do. Those who did were paid until May.
This time, the stock has changed hands several times in this unprecedented ups and downs action, so it’s very possible that it will hit new heights again this year. Momentum traders can also chase a new breakout even in historical highs. While macroeconomic conditions are dire, the government is throwing untold sums of money at the problem. Some of it will affect the company’s P&Ls.
The goal is not to find the perfect entry point, but to avoid obvious false starts. Microsoft stock is worth investing in. The timeframe is expected to be long-term, but it is also tradeable for short-term swings. Anyway, we’ve shared the two tiers that are viable for either purpose. This is not a short stock for no technical reason. It is very important to get rid of all emotion, while investing in it, especially now.
Nicolas Chahine is the Managing Director of SellSpreads.com. As of this writing, he does not hold a position in any of the aforementioned titles. Join his free live chat room here.
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