Market Analysis

MSFT Correction

Poor Bill Gates. He’s very much dedicated to philanthropy and giving away all his vast wealth, yet he can’t help getting richer every day and is once again the richest person in the world gaining over $22B in personal wealth in just 2019. Not bad for a retired guy. I guess it’s hard to give all your money away when the functionings of modern day capitalism make it seemingly impossible to do so. A key driver of Bill Gates’s vast wealth expansion being the same as always: The ongoing meteoric rise of Microsoft stock. Maybe one day the Fed will figure out the causes of vast wealth inequality, but for now they’re too busy grappling with their own system failure turbo charging wealth inequality across the globe.

But I digress, back to $MSFT: The stock has been an absolute beast with one of the strongest trends out there. No down year since 2011, massive growth for a company so large, well executed, strong business model, with a booming cloud business that got the additional benefit of a US government cloud contract this year. And like $AAPL discussed yesterday $MSFT is a big beast in the $NDX contributing vastly to the index gain.

And like the rest of the market $MSFT has seen a vast expansion in multiples and market cap this year.

This puppy ain’t cheap, especially for a company this size:

Trailing P/E of 30 for a company with a market cap of $1.2 trillion. Oh kay then.

But these are risk free markets so why worry? Well I, for one, try to keep a sense of perspective on risk/reward through a technical lens. So, as with $AAPL, let’s have a look at charts.

A basic daily chart:

Like the rest of the market $MSFT recovered fiercely following the 2018 correction, but then based in range all summer long despite the Fed rate cuts. And like the rest of the market it didn’t really take off until the Fed’s balance sheet and repo interventions went full blast in October:

This run has brought the daily RSIs to very overbought readings. Yet overbought readings alone are not a sell signal. The stock, on a daily chart, is extended, but absolutely nothing is broken, no MA breakdowns not even a negative divergence on the daily chart. What can be said is that the stock is far extended above its 200MA suggesting reversion risk as we can observe in the larger market.

The weekly chart gives a bit more nuanced perspective:

A trend break in 2018 and a furious rally below that broken trend, a secondary trend that was also broken, and then a Q4 rally that has brought price to a point of confluence of resistance that the stock may find difficult to exceed from here. The weekly RSI also being highly overbought.

On a monthly chart however we see that the larger trend remains fully intact:

As with $AAPL we see the stock pressing against a larger upper trend and the stock exceeding the upper monthly Bollinger band with a notable negative monthly divergence.

How one sided has $MSFT’s ascent been over the past few years? Only a broader timeline perspective can reveal an appreciation for how outsized the bull move in $MSFT is.

For giggles check the monthly MACD:

Parabolic much? Sustainable? Historic precedence for such a move to be sustainable is precisely zero.

And so the technical argument becomes one of reversion risk.

Here’s a chart I’ve shown a few times this year and its value is the yearly 5 EMA disconnect and the extension above the upper Bollinger band, but one can also appreciate the parabolic nature of this linear chart:

There is no history in the stock remaining entirely disconnected above the yearly Bollinger band. Each year it finds a way to reconnect. Currently the upper Bollinger band is at $110, the 5 EMA at $100. Both will be higher in 2020, but represent reversion risk targets rooted in history, both suggesting massive downside risk in 2020.

The rally  in 2019 has been so furious that fib levels and MAs give a sense as to the scope of even basic reversion risk:

A basic .236 fib retrace offers a target of $144, the .382 fib targeting $134 an area which would be met with strong support as it was the consolidation phase in the summer of 2019. The zone between $134 and $144 also showing key MAs racing higher.

Such a corrective move would not present reasons alone to constitute the end of the bull run in $MSFT, but without new highs following such a correction they may well signal an impending shift.

See, the run in $MSFT has been so vast that not even the 2018 correction shows as a corrective year in $MSFT. The last red candle down year in $MSFT was in 2011.

And again we find ourselves asking: Given high valuations, massive market cap, disproportionate influence on index weightings and so many index funds and hedge funds all owning the same stock an end to a bull market in this stock would present systemic risk for the larger market.

I showed you fib levels for the 2019 rally as benchmarks for a basic correction.

What about going back to 2009?

Yea. Nothing parabolic and excessive about that. It’s only a $1.2 trillion company with a 30 trailing P/E.

Is this sustainable? According to bulls anything is sustainable. The Fed’s got this. Party like it’s 1999.

From my perch this market is reliant on mega cap stocks such as $AAPL and $MSFT to stay on historic unprecedented chart and valuation runs. Trends that are extremely steep, narrow, and vastly disconnected and hence in my view: Dangerous.

I’m not saying these companies won’t continue to grow, or don’t have winning business models. What I am saying is that there is massive corrective technical risk in all of them and given their size and dominance these companies also contain the elements of systemic risk as so many own the same few stocks that dominate everything. For now buying begets buying as all sellers have all but disappeared, but know the exit door is thin on the way out. Should these companies priced to perfection for years to come disappoint these steep channels are easily broken with technical consequences.

As with $AAPL $MSFT is a key stock to watch in 2020. Bulls can’t afford to lose either one of these and their trajectory in price is in my view unsustainable.

Once we see corrective activity in $MSFT and $AAPL we will need to asses any chart damage. Remember tops are processes, but correction risk is vast. As we saw in 1999: Stocks go up forever until they don’t and then everything can change. Fast.

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Categories: Market Analysis

1 reply »

  1. I have made solid returns with this on the way up, figured it was about time to switch roles. Thanks for the analysis Sven.


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