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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

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?

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.

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.

AOL – Money & Finance > symbol (MSFT) = Get Profile

http://ownership.thomsonfn.com/ownership/Ownership.aspx?partner=Mzg0UVU5TUxURT1QJFkEQUALSTO&template=1&ticker=MSFT

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