Earlier today I sold my 100 shares of Microsoft (MSFT) at $23. Truth be told, I should have unloaded the shares a couple of weeks ago. Overall though, I’m still happy with how I’ve been trading this and looking forward to buying back in when goes on the upswing. Below is a brief history of my investments in MSFT.

Originally I bought 25 shares to start a position because I thought (and still do) that the company has a bright future once Vista is released and their online Live component gains some traction. You can read my thoughts on this in my original article here: Buying Opportunity for MSFT Stock.

I kept my initial purchase to 25 because I was a little unsure of the short term outlook for MSFT leading into the quarter. I bought my first shares right after the last Vista delay, and it seemed that more bad news could be coming. Lo-and-behold… Microsoft announces a lack-luster quarter, states that margins on their operating systems and Office software can be expected to shrink in the future, and (perhaps worst of all) declares their intention to spend a little more than $2 Billion to beef up their online services and Xbox segments among others. Well, investors were not to pleased with this.

The first two points are obvious deal breakers, while there is some room to argue on the last one. With regards to Microsoft’s increased R&D spending, there are two camps. Camp 1 wants the company to focus on their strengths (read: monopolies) in operating systems and office software. To these people the $2 Billion in new R&D funds is a waste of money. Camp 2 sees the online services, entertainment, and hand-held segments as prime areas for future growth. These people are excited to see Microsoft finally spending that war chest.

I’m obviously in Camp 2. But then why am I selling? Easy: because everyone else is. After shares dropped to $24.50, I brought my position up to 100 shares. MSFT stock become undervalued at this point (see some discussions here: Is Now the Time to Buy?) and I thought there was a good chance the stock would bounce back quickly. After a week or so, it should have been apparent to me that a quick bounce was not going to happen. But I held on to the stock anyway as it tested previous support levels at $24 and then $23. As I write this, technical indicators are showing that MSFT should go down for a little while longer. Institutional investors are moving out of Microsoft and tech in general as they rotate their investments into other sectors (construction, minerals, oil).

I’ll hold onto a falling stock if I have reason to believe that there could be a very sudden reversal to the upside. I want to make sure I don’t miss the gains. While at the same time I’m ready to buy more shares when I feel the true bottom is found. I no longer feel a sudden reversal is in the cards for MSFT. And so I’m selling my stake.
My plan now is to hold off until the stock truly bottoms out (going to be watching the Stochastics, MACD, and Moving Averages) before moving back into the stock. I’m still long on Microsoft as a company and an investment, but the short term is looking bleak for these guys (and the tech sector in general).

I’ll be sure to inform you guys once I think the stock is turning around. I’m also going to be writing later in the month about other stocks I’m watching (EBAY, PFE, BBBY, DNA, AMD) and going into more detail around the how I’m using the 3 technical indicators stated above to determine when to move into the stocks (hint: following suggestions in Phil Town’s Rule #1).

All the stocks on my watch list above are on the downswing. So please don’t take this as a buy recommendation for any stock. We’re trying to buy undervalued stocks, and most of the stocks in my watch list are undervalued. But we don’t want to find ourselves “catching a falling knife”. The game here is to figure out when these guys are going to move back into favor with investors and get in on the upswing. Cheers to that.

Author’s gravatar

Great article Jason, and better yet a great move on selling MSFT. I think you are going to make your money back when you buy it when it finally bottoms out. Keep watching those indicators and you will be fine.

I also like the comment on how institutional investors are moving away from MSFT and tech in general. That move is going to depress the price even more (which is great for you in the long-run!)

As I type this, MSFT is on its way toward $22 today. But do not be too concerned if a lot of your other tech stocks are suffering as well. The market is currently in a turmoil and we are wintessing lackluster performance all around.

As an example, my personal favorite, Agilent Tech, suffered a huge hit yesterday seeing a $3 drop in price. Earnings for 2Q were fantastic, but forward-looking statements regarding 3Q performance were less attractive. It was a ridiculous drop in price, so it may be a value buy right now (given it does not break its support level by the end of this week). Regardless, it has given me an 84% return on my fake money (Investopedia portfolio) over the last 8 months. It is another great stock for the long run and I am sure you will find your friend, Jim Cramer, agrees.

There is still a lot more of macroeconomic news to be released over the next two weeks, so be prepared from some wild swings. Nonetheless, things will eventually iron themselves out.

Author’s gravatar

Jason, you mentioned that institutional investors are dropping moving out of it. Where did you look for that info?

Author’s gravatar

I don’t think they are going to be going that much lower. If they go down any more I will probably double up on it. With Vista being pushed back, it just means they are going to have a bigger quarter down the road.

But I may be wrong, I thought they were going to go up around the 360’s release.

Author’s gravatar

My comment that institutional investors are moving out is an inference based on how I’m reading 3 technical indicators. Since I’ve just recently finished reading Rule #1 by Phil Town, I’m using his favorites: Stochastics, MACD, and Moving Averages.

There are basically two reasons you can infer “institutional investments” from these indicators. (1) Many fund managers base their trades on these same tools. (2) The math behind how these values are calculated bring to surface trends in the supply and demand of a stock and the momentum of a stock’s price. Since institutions account for somewhere around 85% of the market, trends in a stock’s price are reflective of trends in institutional buying and selling.

I’ll briefly explain how I’m reading these indicators. I will probably elaborate more on these tools as I discuss the stocks on my watch list. If you’re new to technical analysis or my explanations below are otherwise lacking, please follow the Investopedia links. There’s some good stuff there.

The three tools I discuss here can be found on most any site that shows stock charts: MSN, Yahoo!, CNN Money, etc. Some good charts with cute red/green indicator arrows (and default settings I like to use) can be found at BusinessWeek here:

http://host.businessweek.com/businessweek/Chart.html

Stochastics:
– Investopedia Info: http://www.investopedia.com/terms/s/stochasticoscillator.asp
– The Stochastics Oscillator tool tells you if a stock is “oversold” or “undersold”. That may not mean anything to you; read the Investopedia link for more information. In any case, this tool has been indicating a buy in MSFT since the big sell off that happened last month. Still, we’d like to base our trades on more than just one tool.

Moving Averages
– Investopedia Info: http://www.investopedia.com/terms/m/movingaveragechart.asp
– Moving averages are ways of smoothing out a stock’s price movement. So instead of seeing the day-to-day ups and downs, we should see a trend in the stock price. I track the 30-day and 10-day moving averages. Typically, a stock that is above its moving average is going higher. A stock below its moving average is going lower. MSFT’s stock price is currently bouncing off the lower side of the 10-day moving average. If it crosses over, that would indicate a buy. The 10-day moving average is a little more sensitive than the 30-day average, and so it will indicate a buy earlier. I’m going to wait for the 30-day average to be crossed (which is much higher because it includes data from when MSFT was in the $27 range) in order avoid a “bear trap”. Something Phil Town talks about on his blog here: http://philtown.typepad.com/phil_towns_blog/2006/05/chicos_case_stu.html

Moving Average Convergence Divergence (MACD):
– Investopedia Info: http://www.investopedia.com/terms/m/macd.asp
– This tool shows the relationship between two moving averages. By default I’m looking at the difference between the 17-day moving average and the 8-day moving average. We use the 9-day moving average as a “signal line”. If the MACD moves above the signal line, that indicates a buy. This tool (set to BusinessWeek defaults) just indicated a buy today.

So 2 out of 3 indicators are “green” for a buy. We’re waiting on the 10-day and 30-day moving averages to join the party. At this point, the risk of downside will be minimalized (yeah I said it). We saw a massive sell-off today. Tech is still slipping, but the turnaround could be soon. Keeping an eye on these indicators will help make sure we don’t miss it.

Author’s gravatar

Todd, I think the Vista release is going to be huge as well. The upgrade really is inevitable for businesses.

I also think the stock price is nearing its floor. My original plan was to wait for the bottom before doubling up. I held onto 100 shares of the stock because I thought there was a chance the price could bounce up too quick for me to get back in. As I said in my post, I don’t think we’ll see a rapid upswing anymore. So I have time to pull out of the stock and move back in (200 shares later) when I feel things will turn around.

When it comes down to it, I was tired of losing money while I waited for the bottom. I think we could see $1-$3 more downside before the stock recovers. It is easier to watch the stock price fall when I’m not also losing money. Of course, there is the possibility I’m mis-placing the bottom. In which case, I’d be performing the greatest trading faux pas: buying high and selling low.

As to why Microsoft hasn’t been going higher on “good news” like that surrounding the XBox 360: this is just one symptom of the general falling out Microsoft has been having with the investing community.

Author’s gravatar

Phil Town has actually weighed in on the MSFT deal.

Reality Setting in About Microsoft

He does his own sticker-price analysis and comes to a number of $21, which means that by his calculations Microsoft is STILL OVERPRICED!

Is he being too conservative?

Author’s gravatar

I came up with the same number when I calculated sticker using the TVM calculations that Town uses. Unfortunately when a company is growing at a rate slower than your target return (10.5% MSFT growth vs. 15% target) shakey things start to happen to current sticker price.

Author’s gravatar

MACD is very important. What is also important to know is which institutional investors are buying & selling and why. You can have a situation where several big players are selling at a time when their counterparts are not in a position to buy thus creating downward pressure on the stock price. This situation could self correct a few days or weeks later. One of the tasks of the floor specialist is to monitor the big plays.

Sometimes companies announce share buy back programs in order to alleviate an over supply situation. This has a dual function. The first result is the removal of the temporary oversupply from the market. The second result is that the remaining outstanding shares have a higher value and will reduce the occurrence of other large shareholders reducing their positions. Once this happens the MACD will suddenly reverse.

It is not within the scope of this comment to get into specifics – obviously there is more to it – however to conclude that institutional investors are bailing out of a stock based on 8/17 or 10/30 MACD could be misleading.

Side note: Large institutional investors tend to hold onto large caps for an extended period of time and do not play downturns. The smaller mutual funds tend to turnover their positions on an average of 10 months. We could be in the middle of a turnover.

Disclosure:
This comment was written by a CrossProfit analyst. This is a personal view and may not reflect the opinion of CrossProfit.com.
http://www.crossprofit.com

Author’s gravatar

I’d prefer reading in my native language, because my knowledge of your languange is no so well. But it was interesting! Look for some my links:

Comments are closed.