Old tech friend says hello
11/28/17

Don’t look now, but Microsoft (MSFT)—synonymous with “high-flying tech” a generation ago but now often seen as somewhat stodgy—is up around 35% on the year.

Although it may not be discussed in the same breath as today’s FAANG stocks, Microsoft still manages to appear on lists of the most-profitable companies,1 and its stock recently made an eye-popping move. Take a look at the huge up-gap in late October:

Microsoft (MSFT) 10/2/17 – 11/27/17

Source: OptionsHouse

That move came on the heels of the company’s latest quarterly financial report on October 26. The company has had only three quarterly earnings misses over the past 16 quarters,and its Q3 numbers didn’t disappoint, beating on both earnings—by 12 cents, nonetheless—and revenue. Traders responded by taking the stock more than 6% higher (and more than 9% intraday) the day after the release. It was one of MSFT’s 10 biggest one-day moves of the past 15 years.

But as of yesterday, that’s been it. The stock has meandered, likely giving October 27 the look of a spike high in the eyes of some traders: a blow-off move destined to be followed by lower prices. And there’s also that looming gap, which some chart-watchers are probably waiting to be filled.

Microsoft (MSFT) 12/12/16 – 11/27/17

Source: OptionsHouse

Around 18,000 MSFT December $81 puts traded on November 27: Someone capturing premium on a stock they think is going higher, or someone betting on a pullback toward the bottom of the gap? It’s just one day, but more MSFT puts than calls traded yesterday, bucking the stock’s 20-day average of calls outpacing puts by an approximately 2-to-1 margin.

The problem with mega moves like the October 26-27 gap is that they occur so infrequently—historical comparisons can be difficult. Microsoft has made plenty of big one-day moves in its time, but not so many where it’s trading lower 20 days later. As just one example, there have been 156 instances of MSFT trading at least 3% higher and closing at least 1% higher, and then trading above that high 20 days later. By contrast, there have been only 18 instances where the stock was (like yesterday) trading lower after 20 days.

But here’s the thing: In many of the instances where MSFT posted a big up move (and/or an up gap) and immediately followed through to the upside for several days, it often turned lower for a couple of weeks or more. But when it immediately pulled back after the big up day, and was still trading below it after 20 days, the stock was often very close to a short- or medium-term bottom.

Microsoft is unlikely to diverge drastically from the overall market, but what might be working in MSFT’s favor in the near future?

●Aside from crushing its headline numbers, the fine print showed Microsoft exceeded its cloud-computing revenue goals, posted a healthy gain in its Productivity and Processes division (which includes Office and LinkedIn)—and even ramped up sales of its Surface tablet.3 In other words, Microsoft ain’t just windows anymore. (Besides, what’s so bad about Windows, anyway?)

●The broader market is hitting the meat of its most bullish season, and tech is still leading the market.

●The stock established a swing low by managing to stay above its November 17 bottom of $82.24 for five days.

Contrary to popular wisdom, gaps don’t have to be filled. At least not right away.

 

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1 Forbes. The 10 most profitable companies of the Fortune 500. 6/11/2015.

2 StockInsider.com. Microsoft Corporation (MSFT) Earnings. 10/27/17.

3 Business Insider. Microsoft reports a big beat on earnings, stock spikes up almost 4%. 10/26/17.