Microsoft Corp. (MSFT) and Deere & Company (DE) have been in strong uptrends, but the buying has stalled, and the stock prices are currently moving sideways. With volatility near record lows ahead of the FOMC announcement today, these sideways periods are an opportunity to take some profits if holding long positions. Alternatively, traders can await the breakout. But with these stocks (and most of the U.S. market) trading at lofty valuations, that breakout could be to the downside even though the trend has been up. That said, the uptrends have been resilient so there may still be more upside left in the short-term.
Microsoft Corp. (MSFT) isn't a company to bet against, but there are times to take profit in the stock. It has more than doubled in price in the last four years and is currently in an uptrend. During that time, the P/E has also been rising, making this one of the most expensive times to own the stock in recent years. Also, over the last four years, any time the stock has moved higher by 35 to 40% (without at least a moderate correction), that rally has been followed by at least a 10% drop. Since the middle of 2016, the stock has advanced more than 37%, indicating it is due for a correction of 10% or more. After hitting a high of $65.91 in January, the stock has been moving sideways between $65.24 and $63.62.
Given the fundamental and statistical backdrop, a decline below $63.62 could set in motion that 10% (or greater) decline. That would give a price target of approximately $59.32 or below (10% deducted from $65.91 high). A rally above $65.24 keeps the uptrend alive, with the next target at $68. Without a decent sized correction in between, though, an advance toward $68 would leave the stock very overextended and due for a larger drop than 10%.
Deere & Company (DE), otherwise known as John Deere has been in a runaway advance since late-2016. This is the largest advance without a significant correction in the last four years. In 2017 the stock has broken to a new high, surpassing the highs in 2008 ($94.89) and 2011 ($99.80). The move to a new high in 2011 was short lived. The stock moved a few dollars above the prior high and then tumbled below $65. The $112.18 high in 2017 is significantly above the 2011 high, but after rallying through $100, the advance has slowed with the price moving sideways since mid-February. With a nice run to the upside already in place, with minimal pullbacks, the sideways range between $112.18 and $106.72 could be a good place to take some profits off the table. A drop back below $106.72 could trigger more selling, pushing the price to $100 to below.
Those who remain bullish on the stock will be looking to pick up longs near the short-term $107 support area (place a stop loss not far below) or will be watching for a breakout above $112.18. If the upside breakout occurs, a conservative target on a short-term trade is $114.50, with a slightly longer-term target at $117.64 (the size of recent range added to the breakout price).
The Bottom Line
Strong trends have left these stocks at lofty valuations, and they could be due for a correction. A break to the downside from the recent sideways movement could signal those corrections are underway. That said, this uptrend has been resilient and right now these stocks are in uptrends. A breakout to the upside would signal further advances. If that occurs, be conservative on the upside profit targets, as statistically, these stocks are getting overextended and due for a good-sized correction.
Disclosure: The author doesn't have positions in the stocks mentioned.