Microsoft Corp. (MSFT) - Get Report still shows some upside potential as the stock tracks above its 200-day simple moving average at $106.00 and its weekly chart has been positive since the week of Feb. 8. Even with these positives, the prudent strategy is to lock-in some gains up to the $114.39 to $116.13 risky area.
The stock closed Dec. 31 at $101.57, which was an important input to my proprietary analytics. My semiannual level was calculated at $102.25, which I call a pivot, as this key level was a magnet between Jan. 4 and Jan. 29 - its first buy level going into the company's earnings report released on Jan. 30. It showed upside to my quarterly risky level at $116.13. The close of $104.43 on Jan. 31 provided a monthly risky level at $114.39.
My reasons for caution are market concerns. I have been calling the rally since Dec. 24 - Dec. 26 a bear market rally defined since the S&P 500 had a decline of 20.2% from its all-time intraday high of 2,940.91 set on Sept. 21 to 2,346.58 on Dec. 26. Microsoft set its all-time intraday high of $116.18 on Oct. 3 and declined 19.1% to its Dec. 26 low of $93.96. My annual pivot remains a magnet at $102.25 and my annual value level lags at $92.72. The stock is not cheap as its P/E ratio is elevated at 25.69 with a dividend yield of 1.66%, according to Macrotrends. Microsoft is a benchmark stock, as it is the largest by market capitalization.
The fundamental focus of this analysis remains Federal Reserve monetary policy.
Recent comments by a chorus of Fed officials including Fed Chair Jerome Powell have been dovish, which suggests that the federal funds rate at 2.25% to 2.50% is now above normal when my original theme is that the FOMC was targeting the 2.75% to 3.00% as normal. What investors forgot about is the unwinding of the Federal Reserve balance sheet, which will continue until the end of 2019. When the Fed unwinds the balance sheet, it is a tightening move.
Wall Street did not report that the Federal Reserve reduced the balance sheet by $47 billion for the week ended on Feb. 20. When the Fed began to drain $50 billion per month in October, the stock market declined into bear market territory. The Fed is using its balance sheet as its primary tool of monetary policy and every unwinding is a Fed tightening move. The balance sheet is down $519 billion from $4.5 trillion where it was at the end of September 2017. Based on Fed comments, the Fed wants to continue to unwind the balance sheet until later this year. I believe that the Fed was aggressive last week because it felt it could be given market strength. If investors become concerned, the push to new highs could be aborted.
The Daily Chart for Microsoft
Courtesy of MetaStock Xenith
Microsoft has been trading back and forth around its 200-day simple moving average since Oct. 10 and there was a risk of a "death cross" back on Feb. 4. While the 50-day simple moving average fell below the 200-day simple moving average, the stock held its semiannual value level at $102.25 and since Feb. 4 the stock has been above the 200-day SMA now at $105.99. The horizontal lines show my annual value level at $92.72, my semiannual pivot at $102.25, my monthly risky level at $114.39 and my quarterly risky level at $116.13.
The Weekly Chart for Microsoft
Courtesy of MetaStock Xenith
The weekly chart for Microsoft is positive with the stock above its five-week modified moving average of $107.68. The stock is well above its 200-week simple moving average or "reversion to the mean" at $72.68. The 12x3x3 weekly slow stochastic reading is projected to rise to 69.44 this week up from 61.76 on Feb. 22.
Trading Strategy: Buy weakness to my semiannual and annual value levels at $102.25 and $92.72, respectively, and reduce holdings on strength to my monthly and quarterly risky levels at $114.39 and $116.13, respectively.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.