Dow component Microsoft Corporation (MSFT) posted an all-time high at $232.86 in September and eased into a triangular trading range that has been working off extremely overbought technical readings through time rather than price. That exercise may have now entered the final stages, raising the odds for a 2021 breakout that signals another year of superior returns and a potential trip up to the $300 level.
- Microsoft stock has doubled in price since the end of 2018.
- Institutional investors have been loading up on the stock in the fourth quarter
- The stock could post superior returns for the third year in a row in 2021.
- A symmetrical triangle breakout may have to wait for January tax-selling pressure to ease.
The stock has booked a 41% year-to-date return after gaining more than 54% in 2019, lifting into market and big tech leadership. It's well poised to add a third profitable year for shareholders, underpinned by wildly successful cloud computing products and software-as-a-service initiatives. In addition, the next generation Xbox console is now adding to the bottom line, with video games set to book their strongest sales year in history.
Institutional investors have been loading up on Microsoft stock in the fourth quarter, keeping accumulation readings glued to all-time highs. Funds run by Dan Loeb, Stanley Druckenmiller, Andreas Halvorsen, David Tepper, and Larry Robbins have all added to positions or opened new ones, while no major investor has closed positions or reduced size. It is likely that these market wizards expect to get paid in 2021, given the fourth quarter's "flattish" price action.
Wall Street consensus on Microsoft stock is pristine, with a "Strong Buy" rating based upon 23 "Buy" recommendations. More importantly, not a single analyst has posted a "Hold" rating or is recommending that shareholders sell positions, which is remarkable after two years of historic returns. Price targets currently range from a low of $235 to a Street-high $272, while Microsoft is set to open Tuesday's session more than $10 below the low target.
Hedge funds are alternative investments using pooled funds that employ different strategies to earn active returns, or alpha, for their investors. Hedge funds may be aggressively managed or make use of derivatives and leverage in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).
Microsoft Weekly Chart (2012 – 2020)
Microsoft stock underperformed for many years after the internet bubble burst, but that changed in 2013 when it embarked on a powerful uptrend that reached the 1999 high in the fourth quarter of 2015. A breakout after the 2016 election attracted strong buying interest, lifting in a rising channel that accelerated in October 2017. The rally stalled in the fourth quarter of 2018, but price held 50-week exponential moving average (EMA) support, setting the stage for healthy 2019 upside.
The advance surged into the February 2020 high at $190.70 and reversed, dropping the stock into another successful test at the moving average. Committed buyers returned in the second quarter, completing a round trip into the prior high, ahead of a June breakout that added more than 45 points into the September peak. Price action since that time has carved a symmetrical triangle pattern that could soon yield a breakout.
However, sidelined investors may wish to wait for the calendar to flip into January because the prior year's top performers often sell off at the start of a new tax year, with shareholders incurring liability and moving on to lower-risk plays. This seasonal tendency isn't guaranteed but could offer a better price to jump on board. Longer-term relative strength readings seem to agree with this temporary roadblock, trying to shake off lingering sell cycles.
A symmetrical triangle is a chart pattern characterized by two converging trendlines connecting a series of sequential peaks and troughs. These trendlines should be converging at a roughly equal slope.
The Bottom Line
Microsoft stock could post superior returns for the third year in a row in 2021, with the potential to rally above $300.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.