I'm not sure how to describe Tuesday's equity index price action other than Dullsville.
The Invesco QQQ Trust (QQQ) spent the day bouncing on either side of the session's volume-weighted average price (VWAP), and while the iShares Russell 2000 ETF (IWM) and SPDR S&P 500 ETF (SPY) both held above their VWAP for most of the session, it was an undeniably quiet trading day.
Sure, traders had plenty of single-story stocks to trade. If you were quick on the keyboard, you had time to sell D.R. Horton (DHI) short between the $98.50 and $100 window we discussed on Tuesday. The homebuilder beat expectations, but new orders fell short. All in all, DHI's report wasn't bad, but the stock has rallied more than 30% since early November, so in my mind that makes the risk of a sell-the-news reaction pretty high.
Another significant report from yesterday came after the regular session closed when Microsoft (MSFT) announced better-than-expected results driven by strength in cloud computing, but then ruined the good mood by delivering disappointing guidance.
I understand that many investors consider Microsoft a must-own in any growth or long-term investment portfolio, but to be clear, this stock isn't cheap.
The last time I invested in, not traded, MSFT was in 2012. At that time, the stock's price-to-sales (P/S) ratio was around 3.5, its price-to-earnings (P/E) ratio was around 12 or 13, and its free cash flow yield was more than 11%. Today, Microsoft sports a P/S of about 9, a P/E of about 26, and a free cash flow yield of nearly 3.5%. There's a big difference between a great company and a great investment. MSFT is a wonderful, albeit overpriced, company at its current valuation.
If you want to trade Microsoft, go right ahead. Just don't ignore the lower lows and lower highs from beneath the 200-day moving average over the past year. If, however, you're looking for a reason to invest in MSFT over the long term, the stock returned around 22% annualized since its 2009 bottom. I suspect the stock is due for several years -- not months -- of underperformance and sideways consolidation.
As far as earnings are concerned here on Wednesday, about a hundred thousand of my closest friends and I are curious to hear what Elon Musk has to say after the bell about Tesla (TSLA) . While I won't take a position into the report, it's worth noting that the stock is up 40% over the last 11 trading days and the 14-day relative strength index is above 82. Assuming the volatility remains high during the after-hours trading session and following the earnings report, I'd look for dip buyers camped out around $126 to $130 and sellers from $163 to $165. But again, Tesla bulls and bears are highly emotional. If you're going to jump into this mine field, you better have nerves of steel.
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