Normally after a 13% correction I would say that the bulls gave the fight up too quickly. But in this case, that is so far from being true that even a correction that big barely makes a dent in the progress they made. This is even more impressive since they are doing this uphill, blindfolded, and with ice on the ground. The degree of difficulty in this ferocious rally is off the charts (pun intended). Microsoft (NASDAQ:MSFT) is a great company that has been proving its worth for decades. It is not a surprise to see it be part of the gang setting records. MSFT stock is still up over 31% this year and inline with the Nasdaq.
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This company has finally evolved into an ATM machine especially since it adapted to the new tech normal. The rally from the March lows was almost 80%, so it giving back 15% last week should not scare anyone.
Normal price action requires stocks to have weak stints. This is when ownership transfers into stronger hands. Otherwise the rallies become too frothy and vulnerable for devastating corrections.
MSFT Stock Deserves Higher Prices but Patience Is Key
The Microsoft engine itself is very healthy and deserves higher prices. However it needs to trade inside a very expensive stock market. The recovery in equities was indeed of the V-shaped kind.
Meanwhile, the economy is still battered and bruised. Proof of this is that we are still looking for bailouts from the government. To that point it looks like the politicians have given up on it. If they really meant to help their people they would not have left on vacation before getting it done.
I am confident that MSFT stock is one to own for the long term. It would make a good buy-the-dip stock if this correction persists.
Fundamentally almost all stocks are expensive, but Microsoft just isn’t flagrantly so. It has a price-earnings of 35x and the price-to-sales is 11x. While these are not dirt cheap, they definitely are not bloated, either. These metrics are in line with the other giga-cap stocks like Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL), and Facebook (NASDAQ:FB). Therefore the valuation is not a current concern or a reason to sell it, but it doesn’t mean it’s a straight shot up.
Plenty of Support Zones and Tough Road Ahead
Source: Charts by TradingView
There are technical levels to watch because this bounce is likely to face resistance. The MSFT stock bulls will need hard work to get past the $215 per share zone. Their first try is likely to fail, therefore there’s always the risk to fade and retest the neckline from Friday. The danger is if this time they lose it it would trigger a bearish pattern. Although this is not my forecast, that target would bring price closer to $190 per share.
If and when that happens MSFT stock would be a definite buy there. That is a level that has been in contention since February. The quarantine correction started there, and this was the base from which the last 20% rally launched. On the way down, the bulls usually fight hard to hold it thereby creating support. More support lines are also available below that zone. This is a case where the support equals a strong buy-the-dip argument.
The Short Term Zen Level
The easy way to gauge what’s reasonable is to split the difference between extremes. If Microsoft stock was too low in the middle of March, and it was too high at the highs, then somewhere in the middle lies the truth. This brings us back to the major pivot levels near $190 per share.
Mathematically there just isn’t a scenario where it is going to completely collapse. The lows for the year are already in and will likely stand for a long while. There are no sure things on Wall Street else there would be no rewards. But stocks like Microsoft are as sure as they get. This by definition makes them ones to own for the long term and to accumulate on corrections. Investors just need to avoid the obvious mistakes like chasing at the highs.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.