Microsoft meltdown

At Tricio we look at charts in order to gauge investor behaviour and sentiment. The shock tumble of over -10% in Microsoft shares on Thursday is worth noting as this wiped out over $350 bn from the company’s market value. On the face of it the company did a lot of things right, but the market focused on AI spending and likely returns. If the rout extends further this may turn into a broader market event as MSFT has been at the heart of tech returns in the US since it listed in 1986.

We have argued in previous research that MSFT changed the way that tech shares are looked at by institutional investors. Keep in mind that the firm listed in 1986 but didn’t pay a dividend until 2003. Old-school fund managers (before indexation investment took over the world…) tended to like blue-chip companies that paid dividends. The fact that Bill Gates managed to create a ‘moat’ around the PC industry just as this industry took over the world was potentially the backbone of the tech revolution – and US stock market exceptionalism – seen over the last few decades. Regulators and other government bodies have tried to limit the near monopoly position that the firm commands but this hasn’t worked. The firm was in such a strong position in the 1990’s that it entered the S&P 500 in 1994. It rescued Apple in 1997 in part (it seemed at the time) to avoid making it even clearer to regulators that they had created a monopoly in the PC industry.

The firm has a weighting of over 5% in the S&P 500 and around 7% in the NASDAQ 100, underscoring the importance of the company. The long-term weekly (semi-log with 13 and 50-week moving averages) chart below shows that the sell-off on Thursday pressed the rising line from the 2015 low. A sustained break below this line would put the fox in the chicken coop as far as bulls are concerned.

The long-term chart below shows how far the firm has come (with stock splits etc.). A tumble below the green rising line would put the $200/$170 area rising red lines into focus. This is a long way down of course, and we are not looking for that at the moment. But, the reason we look at charts is to gauge investor supply and demand thoughts. A rising support line marks demand. Falling share prices need to draw out buyers when these lines (demand lines) are tested, otherwise supply is seen as dominating and lower prices may be seen before buyers (demand) increases.

If buyers step up and hold the rising green line near current levels this would reassure bulls/holders of the share to some extent. A push above the 50-week ($469) and 13-week moving averages ($478) would help reassert bullish sentiment when seen. Calling time on a bull market is never clever (ahead of time). But, the current tumble is worth watching.

Gerry Celaya, Chief Strategist