The stock market woke up to a deal announcement by Microsoft(MSFT) - Get Report : Its purchase of LinkedIn (LNKD) for $26 billion. But don't be fooled -- the deal won't help Microsoft avert a coming decline.
Incredibly, when I was a young pup at the investment bank Drexel Burnham Lambert in the 80's, I remember the first time a $20 billion buyout was contemplated. It was RJR, and the financial wizardry of Mike Milken and "high yield" (aka junk bond) private placements was needed to get that huge dollar amount into play. Today, Microsoft leadership just decided to write a check from the company's cash balance. Things have changed.
Financial engineering aside, nothing is changing for the forecast that the decision support engine (DSE) gave when it recently (April) allowed us to warn that Microsoft shares should be exited if you were long, especially if using leverage, and consider shorting the stock near 55. Here's the updated monthly bar chart, showing the decline is well established, and has months, not days or weeks, to go before becoming initially oversold; into the green buy box around 36 +/-4.
What is interesting is not the LinkedIn news, which is very interesting to shareholders of LNKD, but should be concerning to shareholders of Microsoft, is that the response of the herd to the news is negative. Microsoft opened lower, and while bouncing a bit, hasn't closed the gap, at 51.45, from Friday's close. That's because the herd was already exhausted with the buying activity in these shares into the April peak, which only double topped with the December peak; not an encouraging sign after a monster rise off the 2009 low that nearly quadrupled the share price.
Adding to this exhaustion is the bearish divergence sell signal created as higher highs in prices in December and April weren't confirmed with higher highs in stochastics (illustrated with the bold blue lines in opposite directions in the price and stochastics panes), and it's no wonder that MSFT shares are headed lower, despite what is being touted as the deal of the decade. It might be, but it likely won't be realized in the next 12-to-24 months, while the heaviness of the falling stochastics drag on prices, and the DSE forecast remains 36 +/-4. The bright red box within the pink box at last month's high is very similar to the condition that occurred at the early 2000 peak. If we are in that analog, then the coming decline in Microsoft shares should test the 34 +/-2 part of the green box; perhaps even needing a spike/reversal below 32.
The message that members of the DSE Alerts service are receiving today is a renewal of the one DSE generated last month as price rose into 52; selling actions are indicated, not buying. Therefore, if long, use 51 as sell stop protection, and if flat as sell short triggers. While some bounce could be found around 46 +/-2, the 50 zone should prove to be significant resistance for months, if not quarters to come.
It's likely that the LinkedIn acquisition is being thought of as an attempt to catch up to Amazon's breakaway from the pack as the new "hammer" in the fields of cloud, virtual assistant, streaming, etc. The question that will probably haunt Microsoft executives is whether or not this deal was the most strategic, or was it too little too late to reign in Amazon.
Don't get caught up in the marketing news of a deal that benefits only LinkedIn shareholders. The time to buy Microsoft is at least 20% lower than today's level, with a likelihood of 35% lower in the coming year.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.