Dow component and market leader Microsoft Corporation (MSFT) has bounced more than 14 points in the past two sessions, attracting the typical legion of bottom callers, but the stock could continue to trend lower into the summer months. The decline could shave 40 to 50 points off Monday's closing print in the $170s, trapping complacent shareholders while setting up a low-risk buying opportunity in the $120s.
Relative strength indicators have crossed into long-term sell cycles after a 14-month uptrend that posted gains in excess of 90%. This is perfectly natural without a system shock, like the coronavirus outbreak, following the market's long-observed tendency for big rallies to be followed by intermediate corrections that generate profit-taking and ease highly overbought technical readings.
Mr. Softee faces major obstacles to profitability as a result of the outbreak, with businesses and consumers cutting back on information technology purchases. Big tech is highly dependent on a thriving economy to achieve its objectives because it is easy for businesses to cut IT budgets when demand drops, as it has in recent weeks. This should affect Microsoft's classic revenue sources as well as highly successful initiatives in cloud computing and software-as-a-service.
Recent warnings from smartphone manufacturers that include Apple Inc. (AAPL) and Samsung Electronics Co. Ltd. (SSNLF) suggest that Microsoft's consumer sales will also come under pressure in coming weeks, affecting PC sales as well as Xbox consoles and entertainment titles. Worse yet, there's no timeline or blueprint for the expansion of the virus or its impact into the summer months, keeping consumers on the defensive and away from popular sales portals like Walmart Inc. (WMT).
MSFT Long-Term Chart (1990 – 2020)
The stock split seven times in the 1990s, gaining ground during an ascent driven by the company's membership in tech's Four Horsemen, which were stocks recommended by thousands of financial advisors as lifetime "buy and hold" plays. The uptrend ended near $60 at the turn of the millennium after the U.S. government began antitrust proceedings, accusing Microsoft of engaging in monopolistic practices with its wildly popular Windows OS.
The stock dropped more than 60% when the internet bubble broke, finding support near $20 at the end of 2000. A 2001 bounce into the low $30s marked the highest high for the next six years, ahead of 2002 and 2006 tests at the 2000 low. A 2007 rally exceeded the prior high by three points before reversing in a failed breakout and downtrend that undercut the 2000 low during the 2008 economic collapse.
A persistent uptick finally cleared the low $30s in 2014 and completed a 100% retracement into the 1999 high in the fourth quarter of 2015. The stock broke out after the presidential election, posting the most prolific gains of the century into February 2020's all-time high at $190.70. The first wave of the coronavirus sell-off relinquished nearly 50 points in less than three weeks, finding support in the $150s on Friday.
MSFT Short-Term Outlook
The uptrend that started in 2015 entered a vertical trajectory in 2019, typical of a climax wave often printed at the end of long-term advances. Price action posted a few minor pullbacks during this period but carved no obvious support levels, increasing downside vulnerability during a correction. In turn, this suggests that the current decline could eventually reach the rising trendline in place since February 2016, setting a downside target in the $120s.
The monthly stochastic oscillator lifted into the overbought zone in April 2019 and held that lofty level into February 2020, when it crossed into the first long-term sell cycle since the second half of 2018. The stock hasn't stretched into the oversold zone since 2015, so two lows posted since that time should be watched closely for support in coming months. It's even possible that a decline will end at the indicator's rising lows trendline.
The Bottom Line
Microsoft price action has set off long-term sell signals that favor much lower prices into the summer months.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.