Bill Cara: Hard landing for Microsoft, Fri., Apr. 28, 2006, 12:45 PM

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April 28, 2006

Hard landing for Microsoft, Fri., Apr. 28, 2006, 12:45 PM

A couple hours ago I wrote something about Microsoft. Did you pick up on it?

In any event, today the MSFT stock is getting hammered (down -10.5 pct as I write). But that's a good thing right ; because it's our job to look ahead, not behind.

So let's have a look.

(MSFT) (MSFT) Financials (Here is the Feb. 25 Value Line report on MSFT: next one is due May 26)

Here is the latest UBS Research report on MSFT, which is rated at "Buy 1" and which says that a healthy trading profit could be made by those buying on this extreme pull-back. Download file

I didn't like MSFT at 28, but I do at 24. At least I think a part position might be good here. The balance I would buy at lower prices after a pull-back in the broad market.

In fact a good tactic here would be to write a ton of puts.

July 25.00 puts MSFT presently bid $1.15
July 22.50 puts MSFT presently bid $0.20

I'd probably sell a few extra of the July 22.50 puts so that if I got totally filled, my cost base would be in the 22's.

That way, with dividends, my 12-month time horizon would be +25 pct (from under 23 to back to 28, noting that the UBS target was just LOWERED to 33). And if MSFT recovers through July, my cost on the stock put to me from the 25 puts would be $25 minus $1.15 minus the extra say $0.60 (three contracts) = $23.25.

Given that the stock has been trading at 28 recently, that's a -17 pct discount, which is ok. Besides a $23.25 price would take me back to the start of the 2002-2006 bull market, which would be a pretty fair position to be in to start the 2006 or 7-2009 bull market (albeit I'm missing that big dividend Microsoft paid out last year.)

I guess my point is that you have to manage positions. MSFT is giving you an opportunity " even if you paper trade for the experience and insights you will find.

And btw, I wrote this article when "stockman" (who just went long) pointed out that the RSI 7=10 on the Daily, 19 on the Weekly and 39 (sure to drop below 30 automatically) on the Monthly. That's an Accumulation Zone.

I tell you; this stuff works. You combine RSI plus all the research links I give you, and, trust me, you can figure it out for yourself. It's not rocket science.

Posted by Posted by Bill Cara on April 28, 2006 12:44:58 PM | Category: 45 Info Technology

Discourse

What would be the strategy, if my broker does not allow me to sell puts?

Posted by: ilelwan at April 28, 2006 1:33 PM [link]

ilelwan, I would add a broker who does, like Interactive Brokers. I say IB because I'm presuming you reside in a country where IB is licensed to trade with the public -- like UK, France, Germany, Canada and the U.S.

Posted by: Bill Cara at April 28, 2006 1:40 PM [link]

Bill. Thanks for your comments. I am new to trading but am learning a lot from you. Now to find some money to trade :)

Posted by: ilelwan at April 28, 2006 1:41 PM [link]

I am looking at the IB site and they seem to have a global presence. I am based in the US and currently have an account with Scottrade which does not let me trade in Canadian securities (AFAIK). Would IB be the right option to trade in Canada / TSX?

Posted by: ilelwan at April 28, 2006 1:47 PM [link]

Bill,

Like you, I am anticipating a market correction. Slowly but surely, I am buying puts, selling calls and selling long positions.

Therefore, I find selling MSFT puts contrary to everything else I am doing. If there is a market correction, wouldn't MSFT be hit hard along with other stocks? Your $23.35 price is just a dollar away. If at expiration, I have to purchase the stock at $22.35, I would loose $1.

Posted by: jragusa at April 28, 2006 2:06 PM [link]

IB allows trading on many of the World's Exchanges including Canada's TSX as well as Futures Mini's and Forex. Options including naked Options are also allowed under certain circumstances.

Posted by: davidtr4 at April 28, 2006 2:08 PM [link]

ilelwan

IB is a good choice.
I started using them at the start of this year.
The commisions are the lowest in canada that i know of and one of the lowest in US.
They are mainly for active traders and are not really set up for novices. I don't know were you are at on the learning curve.
they have a demonstation version of their platform you can look at that will show you what your dealing with.
They are one of the best when it comes to access to multiples markets, but with the exception of the us you will have to pay a fee to trade each.
It is something like $9 for tsx and tsx venture.

On the microsoft trade I backtested buying on low rsi values and it performed very well compared to the buy and hold over the last few years. Perameters were buy on cross below 30 then 20 then 10 on daily RSI in three entries and sell all on RSI>50. There is a name of this system but I can't recall.

Andrew

Posted by: Andy at April 28, 2006 2:11 PM [link]

Andy-

Correct me if I am wrong but I think the $9 fee you mentioned is a monthly fee for the TSX exchange data. I don't think it costs anything additional to trade a TSX stock only to get access to TSX quotes.

Posted by: davidtr4 at April 28, 2006 2:43 PM [link]

davidtr4

Your right $9 month for toronto+Venture exchange. $10us monthly data fee for us markets is is waived if total monthly commisions is greater than $30 per month.

Andrew

Posted by: Andy at April 28, 2006 3:22 PM [link]

I have been waiting for an entry point for MS and therefore, studied it more closely today. I have noticed a classic bearish indicator: On a 10-year chart, the A/D has been trending in he opposite direction to the price over the past few years. In hindsight, it appears that indicator predicted which way the market was going to break from the tip of the wedge it formed over the past several weeks. I would guess that from here, the price will try to fill the gap in the near-term (few months) and then resume downward into '07. Bill's strategy should work very well while it fills the gap.

Posted by: ToddL at April 28, 2006 5:57 PM [link]

ToddL, you are absolutely right. You noticed that (because I fear a bear setting in fairly soon) I picked a three month option, thinking that the price might close the gap before the pull-back.

Long-term I think the MSFT stock will be just another boat caught in an ebb tide. But in the next couple months, I figure just the opposite would happen. As others are starting to break down, this one already did -- with a massive gap, so it could act in a counter-trend.

I'm a trader trying to get a 25+ pct return in a year. If I get it -- or a good part of it -- in 3 or 4 months, I'm happy.

I figure if the market rolls over, this one will have time to close the gap. If, however, the market spikes to an all-time high on the Dow before it collapses, MSFT will more than likely close the gap and probably get into 29 or 30, before pulling back.

Obviously, I'm trading a price -- looking for a pct gain in a fairly short period.

If I end up "owning" MSFT -- which is a trader's way of saying he/she made a mistake, then my price would be low enough over the past couple years that my performance on the trade would beat my peers (if I was comparing myself that way), and I'd have the solace that UBS is targeting 33.

As to some other reader who questioned my strategy, by saying he'd do the opposite or whatever, then I failed to explain my trade properly, that's all.

I'm glad people are observing though.

Posted by: Bill Cara at April 28, 2006 6:12 PM [link]

Microsoft is trading exactly where it was eight years ago.

So is Dell.

So is Intel.

A strange trip.

Posted by: Fred at April 28, 2006 7:05 PM [link]

Bill-

I think there is a VERY good chance we get a spike high in the Dow at or around the Fed meeting that nets you about 10% in a short timeframe. Your downside on this is minimal. I say go for it.

Posted by: MarkM at April 28, 2006 7:47 PM [link]

It's a relative thang for me-

MSFT represents 2.4% of the SPX, the 3rd largest piece. If one is 'benchmarked' to the SPX and has no position this is an opportunity IMO. Based on technicals the stock could easily outperform with a flat or up market near term. If the mkt tanks... I doubt that it would do worse than the market from here.

For individuals... Bill is talking to YOU. Low risk opportunity and methodology.

Posted by: stockman at April 28, 2006 9:26 PM [link]

I have been long MSFT for many years. My belief is we may finally be at a turning point. Even though I have been long the stock I hate the products. It seems the WINTEL and DELL complex is going to get some serious competition from AAPL a much better product IMHO, especially since AAPL computers will allow windows to be run if you need it.
Bill may be right about direction but I would expect some serious pain for the longs before we rebound.

Posted by: kc at April 28, 2006 10:20 PM [link]

Bill,

Would Jan 07 leaps be another way to play this trade?

Posted by: tradinoncoffee at April 30, 2006 12:12 AM [link]