Microsoft (MSFT): Where Market "Fundamentals" Fail, Elliott Waves Prevail

The September selloff in Microsoft made perfect sense... if you just ignored the "fundamentals," that is.

by Editorial Staff
Updated: October 05, 2022

The world's leading tech companies have earned a reputation for asking oddball and unexpected questions to prospective employees during the interview process. For example:

Convertro: "What does 'brimborion' mean?

Amazon: "How would you solve problems if you were a Martian?"

ConnectWise: "You've been gifted an elephant. You can't sell it or give it away. What do you do with it?"

And, perhaps the most perplexing from Microsoft: "Why are manhole covers round?"

What's the point of these, you might wonder? Apparently, they force candidates to think outside the box and flex their creative mental muscles -- a rare trait in such a left-brain dominant industry. In turn, there's no wrong answer, except to say, "I don't know."

Okay. Let's pretend you're applying for the job "Successful Trader." I only have one question for you:

"What drives financial markets' price trends?"

The answer may seem obvious. Economic wisdom 101 couldn't be clearer in its mantra, "News Moves Markets." Specifically, positive events called "bullish fundamentals" cause prices to rise while "bearish fundamentals" beget selloffs.

But is that what really happens?

Let's look at the recent performance of Microsoft, for example. In September, Microsoft was pulled into a broadscale tech tsunami of selloffs. Said The Street on September 30:

"Red, red, red: this was the color that prevailed on the stock display screens of Mega Tech on Wall Street on September 29th.

"Everywhere investors looked, everything was ugly because worries about the various challenges facing technology companies are only increasing."

Billysoft (as it's known in the Reddit community care of its founder Bill Gates) ended September at its lowest level since March 2021. The problem is the rout came amidst one of the most glowing "fundamental" backdrops in Microsoft's recent history.

Wrote Motley Fool on October 1:

"Plenty of ink has been spilled explaining why Microsoft is such a fantastic company. It boasts one of the top (and fastest-growing) cloud businesses around. Moreover, its productivity and personal computing segments include some of the most well-known and trusted applications in the entire software industry.

"And yet Microsoft shares are down 29% year to date."

On October 3, Simply Wall Street called out another discordance befalling the company: "The Two Sides of Microsoft: Strong Fundamentals vs. Insiders' Selling Activity" --

"In general, we want to see congruence between a company's fundamentals and the trading activity of people who know the stock inside-out. The assumption is that these insiders know more about the future of a business than analysts who have limited access to information.

"The last three months saw significant insider selling at Microsoft. In total, insiders dumped $21m worth of shares in that time, and we didn't record any purchases whatsoever. This may suggest that some insiders think that the shares are not cheap."

In turn, despite a pundit-proclaimed "fantastic" fundamental picture, Microsoft plunged to a 19-month low through mid-to-late September.

The mainstream model is problematic. In turn, it's time to think outside the box to come up with a new explanation for what's driving market trends.

And that answer, from an Elliott wave perspective, is investor psychology, which unfolds in measurable patterns directly on price charts. Returning to Microsoft, our Trader's Classroom steps in to offer clarity into the tech stock's near-term trend changes.

On August 2, Trader's Classroom editor Jeffrey Kennedy showed two interpretations of Microsoft Corp.'s potential wave pattern, with the operative labeling shown here: a complex corrective structure. If correct, Jeffrey laid the groundwork to come:

"We could see additional strength this month into August, maybe into September, and then witness another ABC decline."

From there, MSFT continued to rally, hitting 267 on September 12 and then, reversing course in a "red, red, red" decline to 19-month lows on September 30.

Ask me, and manhole covers are round because people aren't made of right angles. But that's just my take!

In the end, not all Elliott wave interpretations of price action are the right answer. Case in point, on September 30, Trader's Classroom revisited Microsoft after its price had endured two weeks of being walloped. There, Jeffrey called for further decline in wave A prior to initiating the wave B rally. Instead, MSFT bottomed on that day without progressing lower. While subscribers expected a bounce, they didn't expect it to occur that soon.

Hey, every roadmap will give you a detour every once in a while. But the map's still the best way "to get there." In that same September 30 Trader's Classroom, Jeffrey also zooms out and presents the big picture view with the greatest probability for Microsoft going into June 2023.

Here's how to watch the September 30 plus the newest Trader's Classroom lessons instantly.