Microsoft (MSFT) - Get Report has been one of the strongest stocks so far this year, but my analysis suggests that it's time to reduce holdings. The stock set a new all-time intraday high of $125.85 earlier Wednesday.
My call is to sell the stock up to $127.62 which is its second-quarter risky level, or price target. This strategy is a prudent portfolio decision as the stock has a weekly slow stochastic reading that is above the threshold of being an "inflating parabolic bubble." This is not a call to go short; it's a call to take money off the table on the high probability that the stock can fall 10% to 20% over the next six months.
Since the stock traded as low as $93.96 on Dec. 26, it's still in bull market territory up 33.5% with the year-to-date gain of 23.6%. Wednesday's fresh all-time intraday high has Microsoft closing in on its quarterly risky level at $127.62. Given this performance it's a prudent strategy to reduce holdings by 25% to 50% to lock-in gains. As another warning the stock has an elevated P/E ratio of 28.65 with a dividend yield of just 1.49%, according to Macrotrends. The multiple for the S&P 500 is 17.6.
Analysts expect Microsoft to report earnings of $1 to $1.04 per share when it reports after the market closes on Wednesday. Wall Street expects its cloud-based business model to key quarterly earnings. This includes revenue from Office 365, commercial Azure and Dynamics 365. Keep in mind that cloud computing is becoming extremely competitive and the landscape can change quickly.
The Daily Chart for Microsoft
Courtesy of Refinitiv XENITH
The daily chart for Microsoft shows the formation of a "golden cross" on March 12. A "golden cross" occurs when the 50-day simple moving average rises above the 200-day simple moving average indicating that higher prices lie ahead. Today the 50-day and 200-day SMAs are $115.80 and $109.46, respectively. When the stock trading to its Dec. 26 low of $93.96 and closed that day at $100.56 a "key reversal" occurred as this close was above its Dec. 24 high of $97.97. The Dec. 31 close of $101.57 was an important input to my proprietary analytics. There's an annual value level is $92.72 with a semiannual pivot at $102.25. The close of $117.94 on March 29 was an important input into my analytics and resulted in a monthly risky level at $115.77 for April and a quarterly risky level for the second quarter at $127.62.
The Weekly Chart for Microsoft
Courtesy of Refinitiv XENITH
The weekly chart for Microsoft is positive but overbought with the stock above its five-week modified moving average of $118.64. The stock is well above its 200-week simple moving average or "reversion to the mean" at $75.57. The 12x3x3 weekly slow stochastic reading is projected to rise to 94.05 this week well above the 90.00 threshold becoming an "inflating parabolic bubble". This is a warning of a pending 10% to 20% correction.
Trading Strategy: Buy weakness to my monthly value level at $115.77 then to the 200-day simple moving average at $109.46. Reduce holdings on strength up to its quarterly risky level at $127.62.
How to use my value levels and risky levels:
Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February and March. The quarterly level was changed at the end of March. My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
How to use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years. The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best. The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble" as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.