Snubbing Microsoft, Sniffing ‘Round Oracle
How many times have you heard the
talking TV heads ask whether now is finally the time to go long Microsoft? They
were at it again today after the latest wrinkle in the Microsoft antitrust case.
Well, the answer sure isn’t now.Â
PE ratios mean nothing. Discounted
cash flow analysis means nothing. The quality of Microsoft’s software means
nothing. No, I’m not even waiting for the court decision that will decide the
company’s fate. I’m waiting for the market to decide the stock’s fate.
As an intermediate-term trader, I shun
most long trades in stocks that are sitting below either their 200- or 50-day
moving averages. Microsoft recently cleared the 50 but remains well off the 200.
The stock also is underneath its mid level, the point where a recently corrected
stock has made up half of its losses as measured by the halfway mark between the
stock’s pre-correction high and post-correction low.
The reason for steering away from
stocks that trade below these levels boils down to overhead supply. Overhead
supply is the portion of a company’s shares in the hands of weak holders,
investors who acquired their shares at higher prices. Many of these shareholders
will feel inclined to sell into rallies, which can thwart upside moves.
Once a stock has recovered at least
half the ground lost in a correction, and has cleared its 50- and 200-day moving
averages, you can consider the problem of overhead supply to be largely behind
it.Â
To find the mid level, just sum the
pre-correction intraday high with the subsequent intraday low of the correction.
Then divide by 2. Microsoft peaked at 119 15/16 on Dec. 30. The stock set its
lowest subsequent low, 60 3/8, on May 26. That puts Microsoft’s mid level at
just above 90 1/8.Â
We also have yet to see clear signs of
big money moving into the stock. Yes, the stock seems to have made a bottom. But
the stock has yet to experience a series of strong up days or up weeks on high
volume. Until we see that, chances are that the stock will remain dead money at
best.
On Tuesday, federal Judge Thomas
Penfield Jackson used a special law to send the case directly to the U.S.
Supreme Court, bypassing the appeals court which has been friendly toward
Microsoft in the past. The judge also froze his own court-ordered limits on Microsoft’s business
practices until the high court acts. The Supreme Court will hear the case, unless five justices vote to send it back to the U.S. Court of Appeals.
Microsoft shares rose 1 1/4 to 74 15/16 on average volume.
After Tuesday’s close, Oracle
(
ORCL |
Quote |
Chart |
News |
PowerRating),
the No. 1 developer of database software, reported May 31 fourth-quarter net
income of 31 cents a share vs. 18 cents a year ago and trouncing analyst
estimates averaging 25 cents, according to First Call/Thomson Financial.
The stock is trading just under its
all-time high of 90, set on March 28. You don’t really have a proper handle
structure off which to trade. If you set a tight stop, you could go long if the
stock clears Tuesday’s high of 87 5/8. But don’t chase the stock more than 3-4%
beyond that point. If it gaps beyond you, look for an opportunity to buy on a
pullback. Otherwise, fish elsewhere. Some of these stocks get away from you.
Â
Â