Microsoft Jumps – Sell Microsoft! (MSFT,QQQ)

Anyone paying attention to markets last week certainly saw the incredible action on Microsoft stock (NASDAQ:MSFT).

It was Friday, the company had just announced a noteworthy earnings beat ($0.62 instead of the expected $0.52), and the stock never looked back. It gapped higher at the open and closed up $4.53 on the day (10.45%), for one of the company’s best sessions ever. Revenues, too, beat estimates, coming in at $21.73 billion for the quarter, versus an expected $21.06 billion.

Take a look –

MICROSOFT FRIDAY POP

The jump can be attributed to a number of factors, among which a re-focus toward cloud software sales, which have been doubling for the last seven quarters straight, may be the most significant.

But is there any more juice left in Microsoft stock? Is it a buy? That’s the question on everyone’s lips.

In our opinion, no. The technicals on the stock look promising for the longer term, but for the next six weeks, we’d place a bright red ‘avoid’ on this puppy.

Why?

  • First up, RSI just pierced above the overbought 80 level (green box). That’s the first time that’s happened since late last summer, when the stock abruptly sold off some 10%.

  • Second, we see a sharp pop in trade volume that we don’t expect to extend beyond Friday’s earnings report (in black). One day jumps of this nature generally fizzle as the stock moves sideways. Any ongoing volume surge, of course, would prove us wrong and would likely lead to higher prices for the stock. We just can’t see it in the near term.

  • Longer term, we’ve likely just passed through a three month ‘island reversal’ (red oval), a formation that’s bolstered by the price action bouncing off long term support at the 411 day moving average (yellow line). Taken together, these developments speak to secure support for the stock at the $45 level, in line with the 137 day moving average (red line).

  • At the same time, however, we’ll likely see range-bound action for Microsoft for the short term, before any rise lifts the stock toward last November’s bull market highs at $50.

We’ll return to MSFT momentarily, but more exciting for many market watchers was the effect that Microsoft’s climb had on the broader NASDAQ Composite Index.

BEHOLD-THE-NASDAQ

As of last Friday, the NASDAQ is now officially in all-time, new record territory. The days of the dot.com bubble are officially behind us, with the Composite’s rise to 5092 besting the former top of 5048 set on March 10th, 2000.

And again the question is whether the move is sustainable, or we’ve just hit a long-term double-top and it’s all downhill from here.

Anecdotal Evidence

Before we turn to the charts for clues, sentiment data also give us good reason to suspect there are more gains to come.

How’s that?

Year-to-date, investors have withdrawn $2.7 billion from the popular NASDAQ proxy stock, PowerShares QQQ Trust Series (NASDAQ:QQQ). Moreover, last year they withdrew some $11.2 billion from the fund. QQQ is still among the world’s biggest ETFs, and it has bested the S&P 500 by a wide margin since the start of 2014; still, a net $14 billion flowed out of the stock over the same period.

And that’s good news.

Whenever investors underestimate a strong performing stock or a sector, it generally means there’s more to come.

Now have a look at the chart –

QQQ-ASCENT

We like what’s on offer here.

  1. First, both RSI and MACD are Goldilocks-nice, not too hot, not too cold and just above their waterlines (in black).

  2. The index has climbed on decreasing volume over the last half year, a sign that we’re not approaching an overanxious teeny-bop top (in blue).

  3. The ascent itself has been smooth and orderly, well within the confines of the red trend channel outlined at the top of the chart.

Taken together, we see absolutely no reason to doubt the continued strength of the NASDAQ. We also believe strongly in the five biggest stocks in the index, which collectively account for a full third of the NASDAQ’s weight. They are – Apple (NASDAQ:AAPL), which grew by almost 60% in the last year, Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB), both of which grew by better than 40%, Microsoft, which is up 20% in the last twelve months and Google (NASDAQ:GOOG) up by 10%.

Do not fear, Nazdakians!

And how do we trade this information?

First of all, have faith in tech, friends. Maybe not forever. Maybe not as a panacea for what ails the human condition. But certainly over the next twelve to eighteen months, barring any global or even regional cataclysm, we should see the tech sector leading the bull’s charge. Healthcare, too, should continue to outperform, but we especially like the five names mentioned above to do the heavy lifting for the NASDAQ as she sets ongoing highs through the rest of the year.

Now the trade.

It’s a straightforward ‘zero premium’ options trade that seeks to minimize your cost to initiate while at the same time maximizing your earnings potential.

And it goes like this –

Given Microsoft’s extraordinary recent rise and the overbought RSI read that accompanied it on the one hand, and the easy-riding rise on the NASDAQ on the other, we’re going to bet on the QQQs outperforming MSFT in the near term.

At the same time, however, we want to allow enough time for the trade to develop in case we run into some unexpected volatility. As we’ve stated over the past few weeks, and as the chart below demonstrably proves, the potential now exists for some wild swings before any new highs are set.

Look here –

US-EQUITY-PRICES

Stock outflows have strengthened over the last three months (blue line), even as the indexes have risen (brown). Unless we see some excitement and some fresh fund flows back into the stock market, we’ll likely get a quick bout of weakness.

It’s for that reason we’re using the January expiry.

Here’s our specific plans to trade this information…

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Wall Street Elite recommends you consider purchasing the QQQ January 119 CALL for $1.97, and selling the Microsoft MSFT January 50 CALL for $1.92, for a total debit of just $0.05 per pair traded.

You profit from any QQQ outperformance.

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Wall Street Elite recommends you consider purchasing the QQQ January 119 CALL for $1.97, and selling the MSFT January 50 CALL for $1.92, for a total debit of just $0.05 per pair traded.

You profit from any QQQ outperformance.

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With kind regards,

Hugh L. O’Haynew

See what people are saying...

  1. gary ziols

    with MSFT now trading at $53+ should I bite the bullet and cover my January call?

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